Online Video Distribution: how will the market play out?

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The online video distribution business model faces increasing challenges, particularly as explosive traffic growth is driving some costs faster than revenues. This is unsustainable – and there are many other changes: in content creation, aggregation, and distribution; in devices; and in end-user behaviour.


The Online Video Value Chain

This new Briefing summarises the evolution of the key technologies, the shifting industry structures, business models and behaviours, the evolving scenarios and the strategies required to prosper.

Who should read the report

Telco: Group strategy director, business development and strategy teams, data and IPTV product managers, CIO, CTO, CMO; Media companies; Broadcasters; Content players.

Key Challenges

In theory, telecom operators should be well-poised to benefit from the evolution of video technology. Fixed and mobile broadband services are increasing in speed, while phones and set-top boxes are becoming much more sophisticated and user-friendly.

Yet apart from some patchy adoption of IPTV as part of broadband triple-play in markets like Japan and France, the agenda is being set by Internet specialists like Google/YouTube and Joost, or offshoots of traditional media players like the BBC’s iPlayer and Hulu.

Many consumers are also turning to self-copied and pirated video content found on streaming or P2P sites. And although there is a lot of noise about the creativity of user-generated video and mashups, it is not being matched by revenue, especially from advertisers.

These changes present commercial challenges to different players in the value chain. Changes in user demand challenge the economics of “all you can eat” data plans (see “iPlayer nukes ISP business model”), content creators face well known issues relating to digital piracy and content protection, while aggregators face challenges monetising content.

Which Scenario will win – and who will prosper?

Our new research uses scenario planning to map out and analyse the future. The methodology was designed to deal with many moving parts, uncertain times and rapid change. We identified three archetypal future scenarios:

  • Old order restored: Historic distribution structures and business models are replicated online. Existing actors succeed in reinventing and reasserting themselves against new entrants.
  • Pirate world: Distribution becomes commoditised, copyright declines in relevance and the Internet destroys value. A new business model is required.
  • New order emerges: New or “evolved” distributors replace existing ones, with content aggregation becoming more valuable, as well as delivery via a multitude of devices and networks.

Which of these scenarios will dominate, when, and what can operators and other players do in order to prosper?

Key Topics Covered

  • Current market and variation across national markets
  • Significant changes and trends in content production, aggregation and distribution
  • Significant changes and trends in devices and end-user behaviour
  • Detail on the scenarios and the likely market evolution
  • Consequences of the changes by content genre (movies, sport, user-generated, adult)
  • Strategies to prosper as the scenarios evolve


Key questions for online video distribution

  • Online video today
  • Bandwidth
  • Penetration
  • Other factors

Emerging industry structure

  • User-generated vs. professional content
  • Aggregated vs. curated content
  • Market size

Future challenges for the industry

  • Content creation
  • Aggregation
  • Distribution
  • Customer environment and devices
  • Supply and demand side issues

Future scenarios for online video

  • Genre differences
  • Mobile video evolution
  • Regional differences

Strategic options for distributors

  • Threats
  • Weakness
  • Strengths
  • Opportunities
  • Strategic options


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Full Article: Online video distribution

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© 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: All rights reserved. All opinions and estimates herein constitute our judgment as of this date and are subject to change without notice.

Executive summary

This briefing summarises key outputs from a recent STL Partners research report 1 and survey on Online Video Distribution. It considers the evolution of the key technologies, and the shifting industry structures, business models and behaviours involved in content creation, distribution, aggregation and viewing.

In this document, online video distribution refers to any video-based material, such as movies, television, sports and user-generated content, distributed via various internet-based (IP) technologies. This includes internet protocol television (IPTV), web streaming and peer-to-peer (P2P) downloading. It includes distribution via any fixed or mobile network, to any device, such as a PC, television or smartphone.

We exclude dynamic two-way video applications such as videoconferencing and video-sharing, as well as traditional broadcasting and physical means of distribution, although the impact of online video distribution on these platforms is explored briefly. Standalone mobile video broadcasting, for example using DMB or DVB-H technologies, is also not considered to be “online”.

In theory, telecom operators should be well-poised to benefit from the evolution of video technology. Fixed and mobile broadband usage are increasing in speed, while phones and set-top boxes are becoming much more sophisticated and user-friendly. Yet apart from some patchy adoption of IPTV as part of broadband triple-play in markets like Japan and France, the agenda is being set by Internet specialists like Google/YouTube and Joost, or offshoots of traditional media players like the BBC’s iPlayer and Hulu. In the background, many consumers are also turning to self-copied and pirated video content found on streaming or P2P sites. And although there is a lot of noise about the creativity of user-generated video and mashups, it is not being matched by revenue, especially from advertisers.

STL used scenario planning to understand the future. The methodology was designed to deal with many moving parts, uncertain times and rapid change. We identified three archetypal future scenarios:

  • Old order restored: Historic distribution structures and business models are replicated online. Existing actors succeed in reinventing and reasserting themselves against new entrants.
  • Pirate world: Distribution becomes commoditised, copyright declines in relevance and the Internet destroys value. A new business model is required.
  • New order emerges: New or “evolved” distributors replace existing ones, with content aggregation becoming more valuable, as well as delivery via a multitude of devices and networks.

In our study we found that these scenarios are not mutually exclusive. In fact, the likelihood is that the current old order will pass through a pirate world phase, before a new order emerges.

In the meantime, the two most important considerations for “distributors” are:

  • Investing in, and adequately managing, sufficient network access and core network capacity. In many instances this will involve partnering with specialist CDNs (content distribution networks) and deploying appropriate network management / QoS technology.
  • Developing improved value-added services, based on network and device intelligence and a two-sided “platform” business model, especially to assist in targeting and delivery of adverts.


  • Key questions for online video distribution
  • Online video today
  • Emerging industry structure
  • Market size
  • Future challenges for the industry
  • Future scenarios for online video
  • Genre differences
  • Mobile video evolution
  • Regional differences
  • Conclusion

Key questions for online video distribution

When thinking about this report and its ‘big sister’ (a strategy report: Online Video Distribution: Fixing the broken value chain), we asked ourselves some key questions based on what we saw happening in the online video arena. These were:

How will the online video market develop and what are the best strategies for aggregators and distributors?

As broadband pipes have grown fatter and fatter, the capability to deliver a quality video viewing experience over the internet has grown. This broadband capability has driven a tsunami of innovation in hardware, software and services – and the eyeballs have followed. Recent data suggests video is the fastest growing segment of all internet traffic and that the trend will continue for the foreseeable future. This is true, whichever metric is used, be it absolute number of viewers, total time spent viewing or data traffic volumes. In the last 24 months, the same trend has also been seen in mobile video, aided by faster 3.5G networks and more capable handsets and smartphones like the Apple iPhone.

Growth is not limited to a specific content category: adult content; sports; movies; and music are all moving online rapidly. The internet has also led to a new category of user generated content. Home movies have moved out of the privacy of the living room and are becoming more professional, while existing copyright material is being repurposed in the legal grey zone of ‘mash-ups’.

Neither is growth limited to a specific geography. The movement online is a worldwide phenomenon, as the internet has no respect for traditional geographies and boundaries. Certain markets have seen faster adoption of fibre, high-speed DSL, cable or HSPA mobile broadband, which drive more (and higher-quality) video consumption.

All the evidence points towards a future where the internet (and other “closed” IP networks) will be a critical distribution channel for all forms of video. Significantly, so far at least, revenue growth for aggregators and distributors has not followed traffic growth.

Are there historical lessons from which to learn?

Innovation in video distribution is not new. Over the past century, we have seen cinema, broadcast networks and physical media creating temporary shocks to older methods of distributing content. Despite the gloom of some predictions, live events, whether sport, theatre or music, remain popular and co-exist with home entertainment. The transition to, and evolution of, these distribution channels and the associated business models will provide clues about the outcome of video distribution as more content moves online.

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 internet video will be additive to, or will cannibalise, their audiences.

A new distribution channel brings opportunities for new entrants to enter markets and disrupt existing markets and business models. The key feature of the internet as an interactive distribution channel adds to the opportunities and the challenges faced by existing players.

User empowerment – for good or ill it is happening, but what will the impact be?

Interactivity has allowed individuals to become distributors in their own right. On the positive side, individuals have generated their own content and made it available to the world. On the negative side, some individuals have used interactivity to distribute content without regard to the rights of copyright holders. Copyright holders have struggled to enforce their rights. Illegal distribution of content not only threatens the absolute value of content, but has also led to the development of unpopular and complicated mechanisms to protect content.

The volume growth of content has placed internet access providers under severe strain. Their attempts to increase prices to compensate for the growth in traffic and gain extra revenue through developing additional services are proving very difficult. Technology-based methods of blocking or prioritising certain traffic types garner a lot of publicity, but also prompt user and legal furore over “Net Neutrality”. These issues have generated a considerable amount of experimentation in the market, especially in the area of pricing models, where subscription, pay as you go, advertising-funded bundles with other distribution channels and offsets and subsidies all exist in various forms.

The net result is that the video market is in a state of chaos. Will order emerge out of the chaos? What form will this new order take? What will be the impact on existing players in the video value chain? And will powerful new players emerge?

What sort of scenario will emerge?

STL’s scenario planning methodology to understand the future identified three potential “core” future scenarios:

  • Old order restored: Traditional distribution methods and business models are replicated online. Existing actors succeed in reasserting themselves.
  • Pirate world: Distribution ceases to be valuable and copyright ceases to be relevant. A new business model is required.
  • New order emerges: Rather than the total breakdown of pirate world, new distributors will replace existing ones as we still need aggregation to guide us through the jungle.

In our study we found that these scenarios are not mutually exclusive. In fact, the likelihood is that the current old order will pass through a pirate world phase, before a new order emerges.

This allowed us to think about what strategies are relevant in which situations, which strategic options can be placed early and which should only be placed when the likely path becomes clearer. In addition, this approach allowed us to look at ‘what you need to believe’ for each scenario and to define milestones that will make the path predictable.

The study places the drivers of future internet video distribution in a technological, economic, social and political framework. It then evaluates the implications of these on content type for the value chain of creators, aggregators and distributors. Research includes literature reviews, desk research, industry surveys and interviews with key staff from relevant organisations. In our strategy report, case studies are produced to bring the story to life and to provide a historical context for both successes and failures.

Online video today

The rise of online video as a market in its own right has been driven by two key factors: increasing bandwidth and growing user penetration.

1. Bandwidth

Bandwidth drives the quality of online video that can be consumed in real time via streaming, rather than the quality of online video that is downloaded prior to consumption, as well as download speed. This significantly impacts user experience – YouTube really took off when it could be viewed in realtime, without lengthy waits for “buffering”. For ISPs and broadband providers, realistic bandwidth is also a key determinant of when IPTV becomes feasible as a mass commercial proposition – it is no coincidence that it tends to track rollout of fibre or higher-speed DSL.

Figure 1 shows the relative quality of media that can be streamed at different broadband speeds and the relative average broadband speeds of a selection of different countries. It should be noted that certain lower-ranked markets have pockets of much-faster users, for example those with Verizon’s FIOS network in the US.

Figure 1: Quality of media stream by bandwidth


Source: The Information Technology and Innovation Foundation

At 4Mbit/s broadband speeds, high quality standard definition TV is possible. By 8Mbit/s, high definition (HD) TV is possible. From 24Mbit/s upwards, any normal sized household will have full multimedia capability. In the mobile world, smaller screen sizes mean that lower speeds can generate acceptable experience, even at 1Mbit/s. Instead, the limiting factors in mobile are more often video processing power, user-friendly interface design and battery life.
Different countries have vastly different average bandwidth, which means there are major differences in the sort of online video services that can be offered around the world. Advanced countries, such as South Korea and Japan, give an indication of how video distribution in other countries should develop over the next five years. In both these countries, a range of video services and new applications has emerged. Due to this, people value their broadband connections more highly and often pay more per user than elsewhere.

2. Penetration

Penetration of broadband drives the attractiveness of the market for video-focused service providers, as larger user bases can be monetised via:

  • Advertising: Selling adverts in various formats against video on the webpage, on the actual video media, or in the media as placement.
  • Offset economics: Players make money from elsewhere and choose to subsidise videos. For example, Google subsidises YouTube via search ad revenue.
  • Exit: Selling a successful start-up service to a larger player. For example, YouTube’s $1.65bn sale to Google has started a rush in this direction.

Consequently, the greater the penetration, the more and varied the services that can be offered. It should be noted that there are various methods of calculating penetration, including reach as a % of either population or household numbers. In many OECD countries, broadband penetration has now surpassed 50% of homes. The growing use of mobile broadband on laptops or high-end smartphones also means that some households (or even individuals) now possess 2+ separate broadband access channels.

That said, there are also benefits for high levels of acceptance within specific demographic or social niches, even if the broad average across the population is lower. So, for example, the advent of prepaid mobile broadband is enabling greater penetration into markets such as students or immigrants, who are well-suited to particular content types (e.g. foreign language).

In coming years, broadband penetration should continue to increase in developed markets, as well as certain developing nations which place an emphasis on it, such as China. One side-effect of the current financial crisis is that various countries (including the US) are including broadband in their lists of beneficiaries of “fiscal stimulus” packages. Other markets are also seeing changes in regulatory stance which should benefit fibre rollouts, or wider use of mobile broadband.

3. Other factors

In addition to bandwidth and penetration, it is also worth noting that various other factors are driving wider use of online video services and applications today. Briefly, these include:

  • Improved integration between web and video software. In particular, the use of Adobe’s Flash video has been a major driver in enabling services like YouTube.
  • Rise in social networking websites like MySpace and FaceBook, which permit easy use of video plug-ins, and encourage users to share video or links, creating viral consumption of content. Other Web 2.0 social media, such as blogs, have also become more video-friendly in recent years, especially as YouTube and other services have made it easy to embed video in web pages.
  • The falling costs of PCs, especially notebooks, has increased the number of PCs per household in developed markets. In some cases, laptops are replacing second TVs as the device-of-choice in studies, kitchens and bedrooms, increasing the time that “eyeballs” can spend on video.
  • Falling costs of video cameras, and increasing usefulness of video features on mobile phones has stimulated additional user-generated content.

Emerging industry structure

The initial online video market was driven by broadband-led IPTV, but with the increasing bandwidth and uptake of consumer broadband, the emerging market has become far more varied in the past few years. In particular, the ease of use of streamed and web-embedded video has transformed the landscape.

Figure 2 shows the emerging structure of the online video industry.

Figure 2: Structure of the online video industry


Source: Revision 3; STL Partners analysis

The industry is evolving along two main axes.

1. User-generated vs. professional content

The traditional video industry of TV and movies is based on professional, studio-produced content. New media plays – IPTV and web TV services such as Hulu and iPlayer – also operate in this way. But as discussed above, technology-driven cost reductions have opened up new opportunities for lower cost user-generated content, as well as an emerging ‘pro-tail’ sector between these two extremes.

One example of the pro-tail trend is iBall, a high quality, five minute, daily web TV show that is produced and distributed by a UK financial services company, Interactive Investor, rather than by a broadcaster working in tandem with a traditional production company. Its aim is to give a more in-depth view of the financial markets, while maintaining the entertainment focus associated with more mainstream media.

The other side of this middle ground between professional and amateur content is made up of increasingly competent amateurs building high-quality content in the hope of obtaining commercial sponsorship. There is also a small but growing market for business-related video, for example for video webinars or news magazines. Telecom TV, in our own industry, is a good example here.

2. Aggregated vs. curated content

The traditional video and TV industry is based on curated content written, produced, edited and scheduled by professionals. However, technology has introduced automation into this process, allowing various businesses to build simple aggregation-based services. Content is thrown up on to the internet and a search engine enables users to find what they need. YouTube is the best known example of this model.

Increasingly, automation is being used in the curation space too. Joost and Babelgum are examples of curated aggregation with content grouped into channels such as action and sport, animation, comedy and drama. Similarly, Phreadz is a video-based chat system that has a fairly sophisticated threading capability to support conversations built around specific conversation threads – or channels, in video terminology.

Another evolution is the tussle between set-top box based online video, which is mainly IPTV, and pure web TV based online video provided by services such as BBC iPlayer. The set-top box approach usually subsidises the box, but it is a subscription-based model that delivers more assured revenues. The web TV model is more likely to be ad supported and has the advantage of running over free architecture so will probably pick up more users. Cable is an interesting hybrid, as the set-top box is the broadband modem equivalent.

Market size

Today, the estimated market size of all online video – IPTV, cable, broadband and mobile – is about $2bn. This figure is made up of an amalgamation of components, including:

  • Subscription revenues for IPTV, typically as part of triple-play or other bundles from broadband ISPs.
  • Advertising revenues for IPTV, online video sites like YouTube and other avenues.
  • Mobile TV subscriptions, or as a component of bundles of services.
  • Pay-per-use or per-download services.

The figures exclude any standalone consideration of basic “pipe” revenues that can be attributed to video – for example per-MB mobile data fees incurred during video download.

Third-party estimates for the same market in 2012 vary hugely, from $10bn to around $70bn.

Figure 3 shows STL Partner’s (fairly conservative) prediction of the online video market, around $28bn, set against the total size of the global cinema and TV markets.

Figure 3: Total video market versus total online video market ($bn)


Source: STL Partners

In financial terms, online video looks small compared to cinema and TV, but the online video market will also drive major disruption in existing video markets as described in “Future Scenarios” below.

Future challenges for the industry

The online video market can be modelled as a value chain from content creation to customer devices. This is often called the ‘four box model’. Figure 4 shows the four box supply chain model and the key trends for online video.

Figure 4: Four box video supply chain


Source: STL Partners

1. Content creation

There have been two major shifts over the past five years:

  • Cheaper content recording and production equipment has reduced costs of capture and creation. The resulting emergence of user-generated content has had a major impact. For example, user-generated content has reduced prices in media professions where differentiation is low, for example, photography. It has also resulted in a huge inventory of short-form media on the internet.
  • The digitisation of video libraries, both by rights owners and increasingly by amateurs with low-cost equipment, has led to a huge back catalogue of long-form video being made available online. This has aided not only the media enterprise operators, but has also driven the market in user copied content – piracy to you and me.

2. Aggregation

The traditional high-cost manual process of content finding, editing and marketing has increasingly been replaced online by low cost, automated aggregation systems. As more media came online, finding content was initially carried out using search engines such as Google.

Now, social media is coming to the fore and networks of friends discover new content. These social networks have also invaded many of the traditional editing functions of selecting, rating and recommending content. Amazon started this with its customer reviews, but the process of peer reviews has become mainstream on the internet, reducing marketing costs for companies as customers do the job that the marketing department used to do.

3. Distribution

Moore’s Law, working open source software, de facto web service standards and a glut of cheap bandwidth and hardware left over from the dot-com bust have meant that distribution costs, per megabyte, teraflop or mbit/s, have plummeted since 2000.

In addition, distribution options have multiplied. DSL, cable modems and various wireless technologies all compete as online video distribution platforms, while standards such as WiFi and various mobile 3G technologies have expanded mobile bandwidth by 1,000 times.

Over the past few years, fixed line distributors in Europe and the US have engaged in vicious price cutting to fill their huge empty pipes. The overriding strategy has been flat rate pricing on both fixed line and broadband, giving consumers near-unlimited upload and download volumes. However, the rising use of online video is threatening to overload the capacity of these networks in some areas, leading to increasing debates about capacity throttling versus charging more to fund new capacity infrastructure build-out.

One example of this is the launch of the BBC iPlayer a year ago. The average streaming use per customer in the evening increased by 60% within a few days- see Figure 5 – and one ISP’s streaming costs tripled within a month. Since this time, the problem has been exacerbated by the launch of higher quality video with associated higher bit rates.

Figure 5: Video is soaking up bandwidth and driving up ISP costs


Source: PlusNet

In the mobile domain, problems can be even greater. Many operators have now launched consumer-oriented mobile broadband services, both via smartphones like the iPhone, but especially via cheap HSDPA modems connected to laptops. Whereas in the past, even “heavy” business users of 3G data cards have only tended to generate around 200MB per month of traffic, it is now not uncommon for consumers to use 5GB, 10GB or even more – especially video traffic. At first, this was just using up 3G capacity that had essentially been built-out several years ago and which had been left almost unused – in other words, incremental revenue against existing assets and sunk investment costs.

But the rapidity of adoption of consumer mobile broadband may not be all good news. Given that price points start from as little as €10-15 per month, with video traffic now moving into higher definitions, this is starting to look unsustainable, when set against the cost of mobile network capacity upgrades.

4. Customer environment and devices

The inexorable march of Moore’s Law and increasing adherence to open architectures, together with increasing device interchangeability and application flexibility, have led to the total cost of ownership falling for both hardware and software. This has created new devices and platforms for video, which people describe as the ‘four screens’ of online video – TV, PC, mobile and games consoles.

Each of these screen environments offers a different user experience, leading the environments to be optimised for different media such as full-length movies and short-form clips. This optimisation, together with bandwidth limitations and business model constraints, will form the principle driver of what video content is offered by the supply side and consumed by the demand side on each of the four screens.

5. Supply and demand side issues

The supply side has rushed to serve the perceived new market and, as already noted, a plethora of new businesses and business models has emerged. How value will be extracted is unclear. Some entrants are building audiences on the basis that a large audience will attract advertising, but it remains questionable whether advertising is going to be large enough to sustain this approach, particularly in the current economic climate.

Other start-ups hope they will be able to charge for services that they are initially offering free. But history shows that consumers are happy to pay for distribution, for example broadband access, and for consumer electronics equipment, such as an iPod, but are less keen on paying extra for online services, such as games, email and content.

Similarly, behaviour on the demand side is not yet clear. For example, a large amount of innovation on the supply side has been in the area of user-generated video (UGV), but most research shows that consumers – and thus advertisers – value long-form and high quality short-form media more. Although volumes of UGV may continue to grow, the bulk of value is expected to be in curated, higher quality content, as shown in Figure 6.

Figure 6: User-generated video drives traffic, long-form video drives revenue


Source: The Diffusion Group

This will have a major impact on distributors. On one hand, there is a risk that distributors will be asked to carry vast amounts of low grade traffic, without necessarily being able to generate the returns to upgrade their capacity. On the other hand, here is an opportunity, given the reluctance of consumers to pay directly for upstream services, to broker content and aggregation services to the end customer.

Future scenarios for online video

While distributors potentially face both threat and opportunity, it is still too early to predict exactly what will happen. There are a number of variables – notably economic and regulatory – that are almost impossible to call, at the beginning of 2009. The depth and length of the recession could have a variety of side-effects on mobile video, ranging from reduced broadband rollout and capex, through to increased consumption of ‘free’ services as consumers avoid the costs of more expensive forms of entertainment. There are also assorted unknowns around regulatory shifts, such as the US FCC’s changing attitudes to Net Neutrality and lobbying on copyright issues. In Europe, there remains uncertainty around the ‘digital dividend’ and switch-off of analogue TV. Allocation of spectrum to broadcasters vs. mobile operators is also a particularly thorny issue.

Instead, as in Figure 7, we can consider three future scenarios; understand what they entail, what has to be believed for them to occur and how to identify when they were occurring2.

Figure 7: Scenarios for examination

Old Order restored

This scenario explores a world in which traditional content aggregators control the value chain in the online world.

Traditional aggregators build an online presence that is additive to their existing distribution channels both in terms of overall viewing and revenue.

Pirate World

This scenario explores a world in which content is freely available online.

The short-term impact will be a shock to content creators and traditional aggregators that will see a rapid decline in traditional revenue sources as more and more people move towards acquiring content on the black market. Some of this content will be delivered online, but not all, as the techno savvy will acquire content online and act as distributors to the less savvy in friendship and family groups.

New Order emerges

This scenario explores a world in which traditional aggregators are trapped in a pincer movement by device manufacturers and new, powerful aggregators.

Device manufacturers build secure content delivery into their products and make ease of use and interactivity key features. Individual manufacturers develop suites of devices to serve viewing both in the home and outside. Consumers happily invest in the latest, greatest gadget.

Source: STL Partners

Working through these scenarios it becomes clear that success will be based not on technology per se, but on which players have the ability and rights to monetise content.

This leads to the following assumptions:

  • Old order restored
    • Re-establishes control and content rights
    • Maintains control of sources of funding, such as ads and subscriptions.
  • Pirate world
    • Success factors include no control of rights, free wins
    • Offset-based funding, including investment and subsidies, that can continue to cover the cost of industry growth.
  • New order emerges
    • New copyright model allows pricing control by new aggregators and creators
    • Control of sources of funding, such as ads and subscriptions, migrates.

Combining these assumptions with evidence from historical case studies, the opinions of industry experts and the outcomes of workshops and surveys, suggests that the scenarios are inter-related. Over time, STL believes that the story told in Figure 8 will emerge.

  • Old order structures will be at risk from disruptive pirate world plays and will continue to come under pressure
  • Pirate world will not be sustainable as there is not enough money to fund an ‘always free’ industry of this size
  • Within pirate world the beginnings of a new order will emerge.

Figure 8: The shift from the old order to the new order


Source: STL Partners

Figure 8 shows a decline in Old Order market share caused by the Pirate World. At this point, the New Order has only a small market share, but over time the New Order gains market share as the Pirate World grows and then collapses to about 10% of the total. The Old Order retreats to its core business and holds about 25% of the total market. The New Order is expected to take about 40% of the market in 2013 and 65% in 2018. This market share will be built on a number of foundations, the most likely being:

  • Old Order players restructure: Old Order players restructure to compete in the new order markets. Two examples of this occurring are Hulu and BBC iPlayer.
  • Outside players make a new market: The classic example is Apple, which has consistently entered markets that are confused or emergent and has driven a high value, end-to-end solution early, capturing a small, but useful, 15% to 25% market share and earning higher than average surplus.
  • Pirates settle down, become gamekeepers: An example here is YouTube. In October 2008, it looked like Google and YouTube would promote the ‘respectable’ face of pirate world, with Google subsidising YouTube as it continued to mount pirated content as fast as, or faster than, Digital Millennium Copyright Act takedown notices could remove it. However, in November, a new financial reality marked a change in behaviour, with YouTube doing deals with MGM to offer ad-funded movies.
  • New trusted guides emerge: Increasingly, consumers will look for people who they can trust to help them navigate through the morass of content. These trusted suppliers will accumulate users as early adopters recommend them to others.

Genre differences

STL Partners examined a number of genres to understand how things will play out. We looked at movies, sport, user-generated and adult content. Movies and sport are major components of video output today, user-generated content is the new kid on the block and adult content is often a bellwether for the future of more mainstream media.

  • Movies: These will feel the impact of pirate world, just as music did. However, movie revenues are more diverse and there are already large streams coming from other areas. Music is only starting to develop diverse revenue streams. The endgame will depend on a new settlement for copyrights. We believe a new concord will emerge as, unlike music, it is too difficult to pirate movies cheaply and too costly to produce new content for free. We believe online movies will be delivered by a combination of Old Order players that have redesigned their supply chains, reformed Pirates and emergent New Order players.
  • Sport: Sport suffers a rapid decline in value after its live date, like news and a few other genres. This makes it less valuable for Pirate World to copy, so the most likely piracy will be illegal live streaming of events where rights already exist. This is an issue, but not on the same scale as rampant copying. However, there are a huge number of events followed globally that are not currently covered. We believe viable New Order businesses can be formed quickly to deliver sport.
  • User-generated content: As discussed earlier, user-generated content is often early to flower, but it tends to wither over time as professional content takes over and more structured markets emerge. We see this occurring here, with the exception of user-generated communications, such as online video social networks.
  • Adult content: The adult content industry is being hit hardest by user-generated content. It faces many problems, but has few solutions. For example, advertising, enforcement of rights, obtaining subsidies or subscriptions are tougher tasks for this sort of content. In addition, legislators are clamping down. We believe this is an industry, like photography, where users can and will create content for free themselves, leading to value destruction.

Mobile video evolution

The initial hype around mobile TV and video has largely stalled, because of a variety of issues:

  • High levels of friction through the supply chain, driving poor returns and poor user experiences;
  • Early reliance on 3.0G networks, often with poor capacity, coverage and latency;
  • Limitations of handsets, including price, battery, screen, application software and useability. For example, some early services took 5+ seconds to ‘change channel’;
  • Poor fit with typical mobile payment methods, especially prepay users, for whom regular subscription-based services tend to be unsuitable.

However, the new generation of mobile smartphones that has emerged following the debut of the Apple iPhone is leading to a resurgence in mobile video, albeit from a small base. Newer devices have faster 3.5G and WiFi radios, bigger screens and faster graphics processors. Improved mobile web browsers and native video software is further improving the experience, while the costs and complexities of mobile-oriented broadcast (e.g. via DVB-H) is helping the pendulum swing back towards mobile online video.

The good news for Old Order mobile players is that this market is still well regulated, making it difficult for the Pirate World to take over any large volumes. That said, the growing prevalence of flat-rate data plans, coupled with more-capable browsers and ‘sideloading’ content via memory cards, presents a challenge to monetisation, as it is becoming increasingly possible to see ‘the real Internet’ on handsets. Nevertheless, various technical and regulatory factors tend to mean that content and bandwidth consumption is better-policed in mobile than on fixed broadband.

Regional differences

As Figure 9 shows, countries such as Japan, Korea, the Nordics and France are way ahead in bandwidth and price. There is a strong correlation between bandwidth, price and centrally planned and managed economies. The lesson here is similar to that of mobile. To get ahead, some form of national – and perhaps in Europe international – co-ordination will be required to move bandwidth speeds and prices forward.

Figure 9: Price and speed of broadband by country


Source: The Information Technology and Innovation Foundation

This co-ordination is key for distributors, as one of the lessons of the planned rollouts is that it is far better to have visibility of revenues to justify rolling out large scale infrastructure upgrades.

Strategic options for distributors

Distributors must act quickly to avert self-imposed threats of inflexible structures and strategies, and realise the opportunities of entering the market by brokering content for customers.


The threats are in distributors’ current structures and strategies. In an STL global survey of 145 telecom and media professionals, there was concern about the ability of distributors to compete, both in terms of creating the right services and in executing quickly if they could create the services.

Figure 10: Online distributors seen as second most likely to lose


Respondents suggested that IPTV would not be the major online video market going forward, with various forms of web-based video services taking the lion’s share of the market. This view is backed up by other forecasts of IPTV against other forms of online video take-up.

In addition, there is a real risk that the sheer volume of online video – and the low value of most of it – will make it uneconomic for distributors to play a dumb-pipe role, especially if this would hand market power to players that will then enter areas of the distributors’ markets, such as edge distribution, service provisioning and orchestration. This is a particular concern in the mobile arena, where it is particularly expensive and time-consuming to add capacity, if it involves acquiring extra spectrum or cell-site locations.


The major weakness pointed out by many in a Telco 2.0 brainstorm session is that distributors, even if they do respond, may move too slowly and with the wrong business models. The rise of web-based video is also making it less likely that subscription-based IPTV will be able to form a cornerstone of future fibre rollout business models.


Looking at potential scenarios and their problem outcomes, there is also strength as the distributors made money in every scenario, which is more than can be said for most of the other players. There is at least some money to be made in providing ‘pipes’, especially in favourable regulatory regimes.

The Pirate World will be one where cash is king and those with deep pockets (like Telcos) will gain market share.


In both the pirate world and new order, the aggregator’s power diminishes and the increasing interconnection of CPE devices with the network will drive new opportunities, giving distributors an opportunity to capture some of the power and value.

Old World economics will be disrupted by the impact of the Pirate World, giving distributors a once in a lifetime chance to move up the value chain and avoid being relegated to dumb pipes.

The requirement is for distributors to use their strengths – cash, valuable users, reach, ownership of a key part of the value chain and willingness of users to pay for distribution and CPE devices – to begin to forge value chains that will maximise the opportunities.

Strategic options

While the emergence of the new order is still unclear, our scenario suggests some activities distributors can plan for and strategic options they can consider.

Figure 11: Strategic map for distributors


ource: STL Partners

Summarising Figure 11, we assume distributors start this model with a flat rate, or perhaps a subsidy, for broadband, as is increasingly common. Added value options then follow.

Moving into Pirate World: We assume there will be little revenue to be gained from upstream players, so the key initially must be to sell extra value-added services to downstream users. For example:

  • Service bundles: Not just connectivity, but buying and bulk-splitting services and material that downstream users would not buy themselves. Examples could be brokered content, perhaps downloads from Amazon, aiding interworking between CPE and devices, access to web services such as VoIP and WiFi, fixed and mobile connectivity, and new web services based around storage, security, social networking and unified directories.
  • Content delivery networks and quality of service: As users and contention increase, some users will pay more for better quality connectivity and services that allow synchronous broadband use.

One issue to examine in both these propositions is how distributors can optimise services and gain revenue by expanding into the CPE arena. Nearly all the research we have seen and done implies that, for the user, seamless interoperation of CPE devices is a major requirement.

As the New Order emerges: We believe that there will be increased economic surplus in the value chain (especially upstream from better-protected aggregators and rights’ owners) so that distributors can seek to develop two-sided market strategies. For example:

  • Higher service levels: Initially, distributors could offer higher service levels for higher value content to upstream service providers. This requires the emergence of a two-sided market.
  • Developing ecosystems: Over time, distributors could develop ecosystems with upstream, downstream and third-party service providers. These ecosystems could exist on Telco distribution platforms and infrastructure.

With a few exceptions, single operators will not be able to drive these strategies alone. They will need to collaborate with each other, certainly nationally and possibly regionally and globally. In many countries, a concerted effort will be required between distributors and government to define the conditions for investment in better, faster capacity.


There are six key conclusions for distributors:

  • The growth of online video will have a major impact on internet traffic, which will experience an order of magnitude growth over the next five years. Our estimates are pessimistic compared to other analysts, so internet traffic could grow more.
  • Although forecast online video revenues of about $28bn in 2013 are not large, they represent an extra revenue stream that will cover costs in converged services and quad-plays where distributors always take revenue.
  • The key opportunity for distributors is to expand their influence in the overall value chain as the aggregation, content and CPE markets undergo disruption in Pirate World.
  • As all value chain models of online video are sensitive to video traffic pricing, the provision of scale will be essential to upstream players. Distributors must leverage this advantage to adopt two-sided business models.
  • Distributors need to create conditions that will allow investment in major capacity upgrades. Where this has been done, it has been done with some form of government or regulatory influence. Elsewhere, distributors will need to influence this, or condition society to capacity overload.
  • In the new order, targeted customer advertising and cost per mille (CPM), as well as the ability to charge for value-added services, will create opportunities for distributors to add value by exposing useful network data and added value services.

For more detail on the evolving scenarios, please see our in-depth Strategy Report: “Online Video Market Study: Options and Opportunities for Distributors in a time of massive disruption”

1 For full details of the Online Video Distribution strategy report, please see:

2 Note: We provide an overview of the scenarios here – for more detail on them and how distributors, in particular, should respond to (or drive) them, please see the strategy report.

A New Role for Telcos in the Digital Economy

Members Only: Members of our Premium Exective Briefing Service and the Telco 2.0 Transformation Stream please click here to access the full article. Non-Members: please see here for how to access this content.


Telcos can avoid inevitable market decline by exploiting their core skills, assets and relationships to create new sources of growth based on two-sided business models.

This ‘Executive Briefing’ provides an overview of the Telco 2.0 opportunity for telecoms operators and explores the potential to create ‘platform’ businesses in the areas of retail, wholesale and B2B2C value-added services.

It outlines the strategic moves required by operators to realise the Telco 2.0 opportunity, and articulates why Telco 2.0 ‘two-sided business models’ are a better long-term proposition than other strategic options open to operators.

The resulting issues were initially addressed in depth in the Telco 2.0™ Market Study in 2006 (updated in 2007), and while much of our underlying analysis remains the same the pace of change has accelerated – and the world has moved on. We’ve therefore now re-addressed the questions given the learning of the last two years in this new report, which can be provided either as a solus piece or in combination with the original report to give a comprehensive overview.

Who should read the report

The report is for those with responsibility for making money from telecoms services. It is for anyone who is concerned about the pressures on the existing telco business model and who is seeking to identify new growth opportunities. This includes institutional investors, regulators, CxOs, strategy leaders at telecoms operators, their suppliers and partners, and business leaders in adjacent markets looking to enter the telecoms market.

Key Questions Answered

The overarching questions addressed in this research report are:

  • “What are the key drivers of change and the key areas of strategic focus now?”
  • “How do we evolve our business model to survive and prosper in this fast changing world?”

The new research provides strategists and decision makers in Telcos, related industries and industry bodies the latest in-depth perspectives and analysis of the market at a macro level from Telco 2.0™. It also serves as an in-depth introduction to the key principles and premises of the Telco 2.0™ world.

Members Only: please click here to access the full article.

Non-Members: please see here for how to access this content or go straight to buy here.


Part 1: The Telco 2.0 Opportunity

  • Telco 2.0: The next business model
  • Major growth potential for operators

Part 2: Why Telco 2.0?

  • Telco 1.0: Nearing end of life
  • Customer demand for Telco 2.0 solutions
  • Lessons from other industries
  • Telco 2.0 uses unique operator assets

Part 3: Building a Telco 2.0 Business

  • Moving Forward
  • Conclusion

Part 4: Further Information

Members Only: please click here to access the full article.

Non-Members: please see here for how to access this content or go straight to buy here.

Full Article: A New Role For Telcos in the Digital Economy

NB. This 30+ page article can be downloaded in PDF format here or browsed on-screen below.

© Copyright 2008. 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: All rights reserved. All opinions and estimates herein constitute our judgment as of this date and are subject to change without notice.

Executive summary

The bundling of voice, broadband data and media content is no longer enough to grow the telecoms industry. This ‘Executive Briefing’ outlines a new approach to growth and argues that a vital part of the business model is missing.

New value lies in addressing the friction that exists in everyday interactions between businesses and consumers, and between governments and citizens. Typical examples include: authenticating users; market research; targeting promotions; distributing goods and content; collecting payments; and providing customer care. Today, these processes are often slow, inefficient and ineffective. They waste money and affect customer satisfaction.

Collectively, telcos have assets that can address this situation: real-time user data; secure distribution networks; sophisticated payment processing capabilities; trusted brands; a near universal subscriber base; and core voice and messaging products.

To realise a new business model opportunity based on Telco 2.0, these assets must be reorganised. A two-sided telecoms market structure is required in which telcos facilitate improved interactions and transactions between people and organisations. Telcos must continue to attract retail consumers and satisfy their needs, but in addition, they should extend the capabilities of their traditional consumer products to explicitly support enterprise business processes.

To do this, telcos will need to create open and standardised platforms that third-party organisations can plug their enterprise IT and communications systems into, just as they plug into the telephone and internet networks today.

We estimate this opportunity could be worth $375bn of new revenue to telcos in 10 years’ time, equivalent to around 30% of total telecoms revenues at that time in mature markets alone. The value to the wider digital economy – industry and consumers – will be many times greater.

There is a sense of urgency. This revenue is not guaranteed and large-scale ‘over the top’ players are also interested in capturing value by re-engineering the value chains of other industries – witness what Google has done with the advertising industry. Operators cannot afford to sit and wait. They must act soon if this opportunity is not to pass them by and this means co-ordinated, cross-industry collaboration to develop the market opportunity. Failure to do this will lead to inevitable decline – see the charts overleaf.

Telco 1.0: The future isn’t bright


Voice and data business model pressures



Part 1

  • Telco 2.0: The next business model
  • Major growth potential for operators

Part 2

  • Introduction
  • Telco 1.0: Nearing end of life
  • Customer demand for Telco 2.0 solutions
  • Lessons from other industries
  • Telco 2.0 business models use unique operator assets

Part 3

  • Moving Forward
  • Conclusion

Part 4

  • Further Information

Part 1 – The Telco 2.0 opportunity

Telco 2.0: The next business model

A new role for telcos in the digital economy

In future, the job of a telecoms chief executive will be to balance three kinds of complementary businesses:

  • An enhanced retail1 platform, which deepens the intimacy of the customer relationship. This is an optimisation and evolution of the existing retail offering.
  • A rich wholesale platform2, which creates new value from network assets by addressing a much broader range of online delivery problems on behalf of a much broader range of commercial customers.
  • A new B2B2C value-added services (VAS) platform that addresses a wide range of business process inefficiencies and costs in the economy at large, again for a broad range of commercial customers.

The third line of business is new and creates what is known as a two-sided market. On one side, the retail platform acquires customers – the downstream end users in the graphic below. The data from these relationships is used to enable a whole new market of upstream organisations wishing to interact more efficiently and effectively with the public. Revenue is realised from both sides.

Telco 2.0 operator: Three businesses


Major growth potential for operators

STL has modelled the potential size of the opportunity to build new wholesale services3, as well as to develop business process value-added services4. The latter was done using a detailed model of 119 different verticals. The potential value of each telco value-added services platform was calculated for each vertical.

The model suggests that, in 2017, the size of the opportunity for new wholesale services will be around $250bn, and the opportunity for value-added services will be $125bn – if telcos choose to execute new strategies.  These numbers are sufficiently large to merit further evaluation.

Western Europe and North American telecoms market


W. Europe and N. America value-added services platform opportunity ($Bn)


Part 2 – Why Telco 2.0?


In this section of the report, we focus on four reasons why the Telco 2.0 world described in Part 1 is attractive to operators:

  • Telco 1.0 is nearing end of life as a business model
  • Upstream service providers and downstream end-user customers have new needs that can be met by Telco 2.0 solutions
  • Other industries provide successful precedents for Telco 2.0 type business models
  • Telco 2.0 business models use operators’ unique assets.

Telco 1.0: Nearing end of life

A complex ecosystem that required central co-ordination

The telecoms industry was structurally stable from the early days of the telegraph and telephone systems, through to the 1980s. This was despite varying fortunes of individual players and rapid technology change. Indeed, many technology revolutions occurred, including: transition from analogue to digital switches; the development of fibre optic cable for long-distance communication; the introduction of satellite and microwave links; and the invention of cellular radio. All these changes left the same operators and suppliers with broadly the same business models as they had before each change. This contrasts with the IT industry, in which the move from mainframes to minicomputers and on to personal computers was accompanied by waves of mass corporate extinction.

The dominant Telco 1.0 business model has two pillars:

  • Vertical integration, where the network owner controls the services on the network and repays the capital investment by billing for them.
  • The revenue model is generally a one-sided market, where the telco buys equipment and content from suppliers upstream, integrates these and bills the end user for services downstream. The upstream side is cost and the downstream side is revenue.

Vertical integration is a model that has proved highly successful. In the late 19th century, the US could be regarded as an emerging economy. The same business model works in today’s emerging economies as they adopt wireless technology. Why is this?

  • Vertical integration brings together all the technological pieces into a working whole. For example, providing electrical power to the user’s handset and cellular base station remains a major concern in Africa.
  • It allows users to pay for service as they discover uses and value for communications systems. There is no need for a sophisticated banking industry or credit management system to enable payments.
  • It aligns value and pricing. Network effects can grow through price discrimination that makes service affordable to poorer users.
  • It provides clear incentives for investment in infrastructure. A business case can be constructed based on specific services and user demand.
  • It is easy to explain and sell to users. Broadband, megabits and gigabytes remain ethereal concepts to many users.

The one-sided nature of the business model has largely been a by-product of the technological limitations of the network and terminal technology. With the exception of freephone numbers and yellow pages directories, there was no viable mechanism for adding richer features to interactions between consumers and businesses.

Political and technology change strains business model

The first major challenge to the traditional telecoms business model came from the privatisation, divestiture and deregulation of fixed networks in the 1980s. Replacement of the PTT monopolies with competition fostered rapid growth. However, this was largely a case of creating many clones of similar vertically integrated telecoms service providers. Every message or transaction was still a potential billable event and advanced features were offered as value-added services, with competition stimulating more features and marketing ploys. Only large corporations bought raw data transmission to connect data processing centres and remote offices, and prices for all services remained high.

The arrival of affordable wireless telephony in the 1990s created a huge global boom. Again, this perpetuated the existing vertically integrated model, extending it from voice to include SMS, MMS and WAP. This effect was reinforced by handset subsidies that meant the network operator also dictated the capabilities of the devices. Thus, the operator could close out rival sources of services and content, forming  ‘walled gardens’. These media portals have generally failed to achieve anticipated revenues. There are a few exceptions, such as ringtones and i‑mode in Japan, but they are not a sustainable basis for funding large-scale network deployments. Today’s IPTV video portals follow the same walled garden model and have similar issues.

Simultaneously to the mobile technology boom, the internet matured from an academic research network connecting tightly clustered research communities, into a global media and commerce platform. A wave of technical innovation in fibre-optics and packet-based routers brought down costs. The Darwinian success of Ethernet and Internet Protocol in their struggle with proprietary rivals created a common open standard and vast network effect for equipment and interconnection. The internet marked the start of a fundamental shift in power, from telecoms network equipment vendors and telecoms standards committees, towards the IT and consumer electronics industries.

For the first time, consumers and small businesses could readily obtain new services and content without the active support – or veto – of their local telecoms provider. Users were hungry for these services and to reach them they needed to subscribe to an internet service provider (ISP). The ISP bridged users to the data network via their existing fixed voice lines, creating the first spark as two opposing business models touched for the first time. The result was a proliferation of dial-up ISPs. The new industry was an accidental by-product of the voice telephony system and was characterised by: free or cheap local calls; competition rules such as per-call carrier pre-select; common carrier non-discrimination rules; and some timely regulatory interventions. As a result of the interventions, internet access prices crashed, with the profit remaining in the ownership of the local loop on which ISPs depended.

At the same time, PCs rapidly became affordable to the average home and office user. Web browsers matured enough to support secure e-commerce, making the net a conduit for money, not just hypertext, and web sites became sufficiently usable for the masses. The outcome was explosive user adoption and demand for underlying telco services such as second home lines. In the Telco 1.0 business model, the internet was far more of an opportunity than a threat.

Downturn prompts defensive change

The twin mobile and internet booms created a capital investment bubble. As this passed through the system during the 2000s, there was a wave of consolidation. A group of powerful regional, and some global, operators emerged. Growth was maintained through two forces for greater user demand: the continued adoption of mobile telephony, particularly in emerging markets; and the switch from dial-up to both fixed and mobile broadband. Scaling the existing business was a greater concern than fixing any inherent problems within the business model.

The supply side also moved to maintain prices through the bundling of services. The ‘triple play’ comprises voice/messaging, video, both broadcast and on-demand, and internet access across both fixed and mobile networks. Thus, over the past five years, most telcos have been working on two core business initiatives: assembling their portfolios of products across the triple play; and solving associated back-office provisioning, billing and customer care problems.

All three components of the triple play bundle are part of a one-sided market. The network operator: buys equipment and content from suppliers; acquires spectrum, rights of way and licenses from government; integrates these with an IT back end; and markets the products to end users through a network of distribution channels. Money is paid to the upstream suppliers and received from a small range of downstream segments, such as the public sector, large enterprise, small business and consumers, divided into prepaid and contract.

A broken business model

Not all is well with today’s telco business model: the triple play is not making expected profits; tensions in the underlying, one-sided business model are increasingly visible; and the surrounding environment is raising the pressure for change. The hyper-growth phase is over in developed markets and the transition phase towards stability and decline of the old business model is coming to a close.

Voice and data business model pressures


Voice service revenue stops growing

Voice service comprises around 80% of global telecoms revenues. Technology improvement, competition and regulation have caused both fixed and mobile per-minute prices to crash. Long ago, fixed voice became a low-margin and high-volume commodity business.

Price elasticity of mobile voice has so far meant drops in per-minute call rates have been outweighed by increased usage. They have also been buoyed by an increased user tendency towards mobile telephony and rising disposable incomes. However, even mobile usage and revenues are peaking in mature markets. For example, in 2007, for outgoing voice minutes in the UK, Vodafone saw a 19% drop in per-minute prices, a 24% rise in usage, but only a 0.3% increase in revenue.

The backstops to high-margin mobile voice revenue are eroding: termination fees are being regulated downwards everywhere; roaming fees, of particular importance in Europe, have been capped; and international outbound calling is being attacked by an array of arbitrage players.

Most markets have three to five nationwide competitors and the physics of wireless naturally lends itself to competition everywhere. The future for mobile voice looks much like that for fixed – not  an easy business in which to make money.

Entry into the video market fails to meet expectations

Video has yet to become a money-spinner for telcos. There are a few exceptions and we discuss geographic variations later. Mobile TV appears to be limited in appeal, with few users willing to pay much to fill in a few moments of boredom as there are many other cheap ways of wasting time. IPTV has tended to be an expensive failure, both technically and in the market, while cable and satellite companies have skills that telcos simply lack, such as content acquisition, packaging, rights management, cross-media promotion and sales of sponsorship and adverts. Cable companies are rushing to take on the business model problems of telephony and broadband ISPs.

In the media value chain, the value is where telcos are weak – aggregation. As media becomes hyper-abundant, the user crisis moves to finding relevant products. Content creation, distribution and consumption no longer have the economies of scale that used to exist. Most people in developed markets can afford an HD video camera, to start a global video podcast site and view the results on a widescreen home theatre system. Even aggregation is becoming automated using algorithms and feedback from user behaviour. These aggregation functions – search, filtering and organising – are all dominated by IT companies. Telcos have been left producing IP-based emulations of media from the analogue era and are missing all the best ideas from the essential aggregation step.

Fundamentally, online media cannot be the growth engine of telecoms as it is becoming a hyper-competitive business with low barriers to entry. The value in telecoms has always come from connecting people, not from directing eyeballs to media.

Data services: cost inflation and pricing problems

Data services were supposed to be the industry’s salvation. This has not panned out as expected. As markets mature, revenues flatten as price competition is the only way to differentiate otherwise identical broadband products. Users get a taste for online video, which creates demand shocks and increases in peak-hour usage, thus driving additional capital spending. In many markets, the costs of backhaul are also significant.

Effectively, ISP customers are being sold mispriced options for nearly unlimited communication. Traffic shaping is only a stop-gap solution to managing costs and it is not possible to win a cat-and-mouse game with your own customers. STL expects the current mobile PC broadband boom to end in tears for many players as capacity is exhausted and cellular congestion increases in a few key concentration points, driving user dissatisfaction and churn.

Another problem with triple play is that completing the bundle can be expensive. Cable companies are compelled to enter the voice business, with slim margins on fixed networks and very high wholesale costs to buy in mobile voice as a mobile virtual network operator (MVNO). Telcos have to compete against entrenched players for rights to premium sport and entertainment. Mobile operators become unbundled local loop broadband providers, without having the scale to make the economics work.

Over the top attacks the bottom line

SMS continues to grow as a business, but price competition is creeping in, with unlimited bundles on offer and termination fees under regulatory pressure. SMS is threatened by IP-based bypass services that charge the user little more than the cost of terminating the message, but this threat to SMS should not be over emphasised. SMS is a convenient, simple and universally available service. For an arbitrageur, nearly all messages are off-net, whereas the telco that charges full retail prices for on-net SMS can use the charge to subsidise off-net SMS at, or below, cost.

The real problem is that users may abandon SMS for other forms of IP-based messaging. These include:

  • IM, which offers status and presence data
  • Twitter-like services, which excel at large group messaging
  • Voice-based messaging services, such as Phweet
  • Social networking sites, which have more raw data on ‘what’s going on?’ to induce new conversations.

A move away from SMS is being made in markets such as South Africa, where MXit, an ad-funded group text messaging service that uses GPRS, or 3G, rather than traditional and expensive SMS, has enjoyed tremendous growth. Introduced in 2005, MXit had 6.5 million users – around 25% of mobile subscribers – in South Africa by May 2008.

With voice, the situation is reversed, with arbitrage of the internet having more effect than complete substitution of the telco service. Voice over IP (VoIP) has largely failed to catch the public’s imagination, with good reason. As the price of circuit-switched voice has crashed, the incentive to jump through usability and provisioning hoops to avoid operators’ tolls has vanished, while few VoIP services have offered anything to differentiate themselves from basic telco voice services. Instead, people are using the internet as the signalling medium to set up calls and then enjoying the lowest possible originating and terminating charges, without the outrageous telco mark-ups for services such as international calling.

The growth of over the top internet services, with the telco as bitpipe, has prompted efforts to refresh core telco products. Technologies such as Internet Multimedia Subsystem (IMS) and Service Delivery Platforms (SDP) have been pushed by vendors as the basis for operators to launch dozens of new services quickly. However, the operators’ hands are tied by the very success of existing vertically integrated voice and messaging services. It is extremely hard to make any substantive changes. Most new features of interest, such as presence, cannot be deployed unilaterally, but to deploy across carriers it would be necessary to upgrade every handset and network, plus retrain support and sales staff. Interoperability of basic services, such as MMS, is still far from perfect or complete and interoperability of new services, such as push-to-talk and instant messaging (IM), is very limited. Telcos are not well positioned to fight the internet ecosystem in a battle over features targeted at end users.

A changed environment

During the long boom in telecoms and IT, risk capital poured into dotcoms. Few flourished, given the constraints of the day, but time is proving many of their ideas to be right. Application innovation is now largely outside telcos and network equipment providers. However, the telco business model is to build out each new network so that it either reaches people and places that others cannot reach, or offers speeds or capabilities that enable services others cannot replicate. To recoup the capital cost, telcos bill for the transactions conducted via the services deployed on the network.

The booms in mobile and internet fuelled growth hid the inner tension with the telco. The internet disintermediates the telco from the services value chain. Without the billable events that services generate, there is only data transmission to charge for. Megabytes and megabits are very weak proxies for end-user value. Without the ability to achieve value-based pricing, it is very difficulty to pay for the network.

Efforts to date create limited impact

Network operators are aware of these issues and are experimenting with new business models. Paid for premium content remains a perennial favourite. The problem with this business is that static media, as opposed to interactive, suffers from rampant piracy. The only solution appears to be blanket licensing that neither the content owners or government seem willing to offer or impose. Meanwhile, Apple continues to dominate music distribution and television companies are forging online distribution channels independently of the telcos.

Likewise, telcos have been testing the advertising business5, both as suppliers of inventory to host advertisements and as providers of services to optimise ad insertion into third-party content.  There are two small problems with this – and one big one. The amount of telco inventory is generally rather limited, as increasingly users go off portal, while for third party sites, there have been privacy and public relations issues with telco-powered ad insertion (witness the ‘Phorm storm’ in the UK).

The big problem is scale. By 2010, the entire online advertising industry – including Google – will amount to around $62bn. This sounds like an attractive market, until you discover that the entire telecoms business is estimated at around $2,490bn. Even if telcos got 25% of the online advertising market, advertising is too small a business to make any serious impact on the fundamental problems of the telco business model.

Other forms of diversification have met with varying degrees of success. Several telcos have built valuable services arms, offering systems integration, IT support, network management and hosting. Some have successfully entered banking and payments in both developed and emerging markets, while others are testing identity and authentication services. However, none of these complementary businesses can fix the problems of the core business. To date, what is also lacking is a coherent framework to help telcos provide the widest possible range of business processes across the widest range of industries. At present, these opportunities tend to be tackled as piecemeal business development activities.

Telco 1.0: The future isn’t bright


Change is needed, but must be carefully timed

The problems of the Telco 1.0 business model are not experienced equally by all. Fixed operators have fallen further and faster, forcing restructuring and diversification into complementary businesses such as systems integration and outsourced IT services. There are also regional differences: European operators are under the most strain; while North America remains a rather special case. In North America, receiving party pays voice and messaging, oligopolistic market structures and relatively weak regulatory intervention have left a few of the largest telcos and cablecos in a comfortable position. Meanwhile, the tier two and tier three operators are desperate for new business models. Elsewhere, Japan and Korea are trendsetters in technology, but their business models often fail to work in the rest of the world. Emerging markets are, rightly, continuing with vertical integration as modular, horizontal market structures are a sign of maturity, but there is also potential to leap-frog existing business models when not tied to an expansive legacy.

Industry support for Telco 2.0 strategies


Customer demand for Telco 2.0 solutions

The flipside of problems in the telecoms business model is that there are problems in the business models of all organisations. Where the telco has assets that can potentially reduce problems, every problem turns into an opportunity.  Starting close to home, telco assets can be used to solve business problems in the online media value chain6. This approach can then be generalised to help fix inefficiencies in common business processes across a wider range of economic activities.

Online services commonly suffer from the following problems:

  • Hard to pay for access and get provisioned: You visit friends, a client’s office, a coffee shop, an airport lounge. Every time, it is a new challenge to get online.
  • Advertising everywhere: Our eyeballs are continually polluted by irrelevant product pitches. The option of payment to avoid adverts us usually missing. Where you can or must pay, it is a tedious process.
  • Spam, viruses, phishing, 409 scammers: The attitude seems to be a big shrug because the cost of building strong identity schemes or creating proper governance, issues we take for granted in telephony and SMS, are too high.
  • A new site, another identity: Why do we have to enter usernames, passwords, address, date of birth and credit card details everywhere we go?
  • Lack of support: If a support line exists, expect the details to be well hidden.
  • Poor personalisation: This starts with multi-language and localisation support, but the problem is far broader in that services rarely adapt to you, your preferences, or your lifestyle.

The limitations of these services are often caused by the limited capabilities a telco can bring to bear.

Upstream customers want Telco 2.0 solutions


Further efficiency is possible in consumer interactions

Labour, energy and interest are wasted in real-world business processes. Parcels are brought to the door of your home, only for a ‘Sorry you were out’ note to be left – the telco knows you were away. Customers sign up for online services, which then spend considerable amounts to verify your identity – the telco has credit checked you, seen you in person, or been to your home. Customers call to complain that their games console or media box download is not working – the telco knows there is a network operation or configuration problem.

This scenario suggests a very different future for the telecoms industry than the one usually promoted. Instead of introducing hundreds of paid-for services and trying to market them to ever smaller segments, telcos should tackle a few universal business problems. The idea is to try and take a thin slice out of many industries, rather than piling all hopes into the online content and services business.

The trillion dollar rethink

Given these issues and opportunities, it is necessary to answer two questions: what is the purpose of a telecommunications service provider; and what does the future business model look like? To provide credible answers, there must be a clear journey to the future business model. This does not mean throwing out today’s business and starting from scratch. Instead, we need to answer the following questions:

  • How should underlying telecoms infrastructure be funded and what is the role of the telco in this?
  • How do we protect and evolve core voice and messaging products?
  • How do we turn online video distribution into a profit driver, rather than a cause of cost inflation to the ISP?
  • How do we create more value from current assets, both physical assets, such as networks and IT systems, and assets that are less tangible, such as brand, trust and customer data?
  • How do we find new classes of customers to service and, therefore, new revenue sources?

In answering these questions, there is a need for change in the industry to reflect a new world that is increasingly unlike that experienced before.

Lessons from other industries

Today’s pain points in the telecoms industry are not unique. There have been many previous manias, booms and busts in infrastructure-based networked industries, such as canals, railways and airlines. Telecoms is also not the first industry to restructure from vertical integration to a much more horizontal and modular structure. For example, in the late 1920s, Henry Ford commanded that a car factory be built in the Amazon basin. It would be near his rubber plantations and break an Anglo-Dutch monopoly on quality rubber.

Three lessons can be learnt by examining the history of vertical integration:

  • As industries mature and value chains get longer, the role of wholesale and business-to-business transactions increases.
  • Transport industries serve as a strong precedent for telecoms.
  • The money comes from using data by-products of business processes to form insights that allow you to solve business problems for your customers.

A shift in focus from retail to wholesale

As an example of the first lesson, consider the financial services industry, which has seen massive restructuring from the 1970s to today. Once, mortgages were bought from retail banks or mutual savings societies that would keep them on their books and collect payments until maturity. Now, people go to comparison websites that refer on to a broker who sells a branded loan that is immediately securitised and then derivatives traded to distribute risk, albeit with some clear failings unique to financial services. Each of these stages produces a market in intermediate, rather than finished, products.

Transport logistics as a precedent for telecoms

Logistics companies perform two services: distribution of products; and value-added services to smooth the supply chain. Future growth in telecoms will come from telcos acting as digital logistics companies, supplying customised logistics solutions to upstream customers. There is an added twist of two-sidedness, as each interaction can be personalised to each end user – something that does not happen in the physical world. For example, Fedex should know if you are home, but it does not.

Off-line logistics: Distribution and value-added services


Online Telco 2.0 logistics: Distribution and value-added services


Telco 2.0 logistics is a far grander and more profitable enterprise than a dumb pipe. It turns ‘over the top’ competitors into customers and they become a source of value, rather than a threat to revenue and sources of cost.

The value of logistics solutions in shipping

It is hard to sit through a telecoms conference without hearing dumb pipe mentioned at least once, but the reality of distributing goods and services is considerably more complex than this feared phrase admits. The container shipping industry provides us with a clear model.

Containerisation started in the mid-1950s, displacing the earlier break bulk system in which loose cargo was loaded individually. Shipping containers are to physical goods what IP packets are to information goods, a standardised form of distribution, capable of conveyance on many underlying modes of transport. The break bulk system bears a strong resemblance to the vertical integration of circuit telephony and SMS. The caveat is that telecoms and information goods do not always behave in the same way as the transport of physical goods. Data can be transmitted instantly, without the need to store and forward it, it can be copied at  no cost and the value of data is largely derived from the context of its use, rather than being intrinsic.

The winners in the transition to containerisation were not the shipping lines. Some ports that invested in new systems, such as Singapore, Rotterdam, Dubai and Newark, fared extremely well due to increasing returns to scale. Some that hesitated, such as London, or invested in the old model, such as New York, lost all their business. However, it was a logistics company, Maersk, that became the largest and most powerful player in the container industry. It was able to solve the problem of getting goods from factory to wholesale warehouse and beyond by assembling the necessary multi-modal transport services. It still owns ports and shipping lines, including the first transatlantic container company, Sealand, just as telcos will continue to own and operate networks.

Telco 2.0 business models use unique operator assets

Despite the moniker of being ‘service providers’, most telcos provide startlingly few and thin services, and create very little value out of the data they accumulate. This can be contrasted with other industries, such as aircraft jet engines. Many years ago, the engine salesman would be beaten down on price by the airline’s purchasing department, but would make up any loss with expensive spares over subsequent years. This created the perverse incentive to produce unreliable engines. Similarly, telecoms operators have misaligned incentives. For example, how many phone calls start with ‘Sorry, I’m on another call, can you phone back later?’, or see the caller bounced to voicemail because the recipient is busy? The airline industry has shifted to a new system that gives incentives to manufacturers to keep their engines running. Telemetry systems that radio performance data back to manufacturers each time an aircraft lands enable them to make adjustments, before things go wrong. Faults are detected and repaired before they happen and problems can be addressed quickly, before they result in a total breakdown, keeping the engine in service and improving safety.

An example closer to the digital world is Google, which reclaimed the latent value of hypertext links between web pages by treating each link as a form of endorsement. In turn, this was used to create Google’s search algorithm. User behaviour around which contextual adverts are clicked on then drives which adverts will be displayed. Google’s business is built on treating all data as potentially valuable business insight.

Operators have a huge volume of user and network data that could be used to ensure that:

  • Telco and partner retail products perform better for end users
  • Wholesale products are similarly improved
  • Third-party service providers benefit from the B2B enabling services of the value-added services platform to ensure that their sales, marketing and delivery processes are also improved.

Operators struggle to identify and abstract the data they hold and turn it into meaningful information, but that is not a sufficient reason not to address the problem. Google has shown that small volumes of customer data are extremely valuable and that customers willingly part with information about themselves if they receive value in return. For Google, users happily give away information about what they are searching in return for a list of web pages containing highly relevant information and products.

Telcos have a large volume of latent data assets


Google makes do with very few pieces of data…


…but has built a valuable platform business fast


Part 3 – Building a Telco 2.0 business

Moving Forward

Fundamentals: Separate infrastructure from operations

In the long term, passive infrastructure will become part of a completely different multi-utility business and not part of the telecoms industry at all. For example, when is the right time to dig up the road to lay fibre? It is when this coincides with replacing rusted lamp posts rather than when an optical switch is replaced.

It is likely that telcos will want to continue to own or operate active network infrastructure, particularly as the IT-centric parts crash in price and go open source. This is a stronger drive for a telco that is wholesale-centric than of a telco that depends for competitive advantage on the branded retail side. The latter could probably outsource network management and operations.

The primary reason to search for cost savings through shared infrastructure is that it is becoming more difficult to pay for the network through billable events on a telco’s own services. This will push access networks towards a new ownership model: network sharing; open access networks; municipal backbones; and vendor operated networks. This is a huge area, but not the subject of this report.

There is another, more subtle, reason why telcos should work hard to avoid creating competing, but ultimately duplicate, access networks. Competition in the distribution of digital goods and online services is moving down the value chain from the core of the network to the edge. Once it was the owner of the long distance network who ruled: AT&T dominated the independent local phone companies in the US because they needed interconnect and their independent existence was largely maintained by regulatory fiat. Then power shifted from the network core to access networks. Without effective unbundling rules, the US local exchange carriers and cable companies have collected monopoly rents. Mobile operators have spectrum auctions as a barrier to entry, as it is difficult to gather together nationwide or continent-wide coverage.

Now we are in a third wave, where the critical assets for distributing content and services are at the network edge: in the home; the office; and in the user’s mobile handset. Investing in access networks as a source of competitive advantage is often a waste of resources. It does deliver enough differentiation. The differentiating assets are in home and office networks and include edge devices, software, local storage and content.

Key actions to lay the foundations of a Telco 2.0 business

  • Divest infrastructure assets and activities that are not strategically aligned with the Telco 2.0 model.
  • Organise the business to tackle the three strategic opportunities around retail, wholesale and value-added services platforms. The value-added services platform is likely to be new and will need careful nurturing.
  • Create new financial and operational metrics to measure the progress of your move towards a Telco 2.0 organisation.

Become a better retailer and evolve triple play

The retail arm of a telco acquires users and creates a customer relationship. The core product is the triple play and is the ‘bread and butter’ of most operators. However, few, if any, of today’s telcos are really adept at selling the digital lifestyle, especially when you compare their retail stores to those of leaders such as Apple and Best Buy. Becoming a world-class retailer is a major challenge. Nevertheless, here are the steps needed to get there:

  • Bring on more partners and broaden the product mix beyond media content: Grocery stores offer a wide selection of products within each category, including own label and third-party brands, so that customers can find the products they want. Recently, they have extended this approach into banking services, insurance and even telecoms through a network of partners. Operators themselves have a very limited range of offers: ‘one size fits all’ voice and messaging; data; video; and a handful of portal services that are poorly marketed and difficult to find. They attempt to match customers to what they offer, rather than the other way round. This is a key reason for the lack of differentiation in the industry and the high levels of customer churn.

Telcos need to offer a range of devices and services that satisfy the underlying user need, such as ‘keep me in touch with my family’, a digital photo frame tied to a picture messaging service, or ‘lower energy bills’, a smart meter that offers a text-based advisory service on energy usage.

  • Invest in customer insight: Through the use of data mining, especially loyalty schemes, grocers have become very adept at promoting the right offers. An unread insert sent with a telecoms bill is not enough. In the UK, Tesco has developed tens of thousands of customer segments for its store shoppers, based on the information captured through the Tesco loyalty card. The online part of the business,, is even better at customer relationship management as every customer is treated separately and receives a unique portfolio of offers based on buying patterns.

This insight needs to be shared back along the supply chain. Good retailers share at least part of this information with their suppliers so that the whole value chain reacts faster to changing consumer demands and manages product development and inventory more effectively. This will be a key component in reducing product development lifecycles in telecoms and making the industry more flexible.

Customer insight and supply chain management are core parts of a basic retail skill: category management. Retailers break products and services down into groups, or categories, and manage these as a family, often with separate profit and loss responsibility. The advantages are obvious: increased management focus; an ability to think about growing the whole category rather than one brand or product; easier to manage suppliers of products and brands within the category.

Operators, on the other hand, often do not have anyone responsible for their most important product – voice telephony. It remains everyone’s and nobody’s responsibility. Although the CEO ultimately takes the rap, nobody else is solely responsible for arresting the voice category’s decline and turning it into a growth engine once again.

  • Make billing simpler and easier: We all know the Kiss principle – Keep it simple stupid – but, historically, operators have expected customers to segment themselves based on an ever-expanding range of tariffs to suit different calling patterns and budgets. The result is confusion for customers and sales and customer care staff, as well as huge systems and management costs.

For example, on the UK website, which provides price comparisons for products, there were 550 different packages offered for a Nokia 6300 with 200 texts and 400 minutes per month. A bewildering number of different enticements are bundled in to deliver essentially the same offer. The enticements included handset subsidies, insurance, cashback, Nintendo Wii or other gaming consoles, laptops and fixed broadband. This does not differentiate operators from one another, it only devalues the core telephony offering and creates confusion among consumers.

  • Turn customer care into relationship sales: Every customer contact should be a sales opportunity. This is not just basic reading of a script, but a genuine conversation where a sales person listens and learns about the user’s needs. Operators hold huge amounts of information about their customers and could use this to ensure that call centre based conversations are more effective and efficient. As a start, because each Caller Line Identification (CLI) is linked to an account, it should be simple to automatically route calls to the right agent based on CLI rather than expect customers to wade through an interactive voice recognition system. This is one example of using customer information and technological know-how to improve the customer care process. Another would be to furnish agents with better information about customer behaviour so that they can offer suitable solutions to customers. Knowing a customer’s click-stream or call-stream history would enable care staff to provide compelling offers. For example, on noticing that a customer calls his or her bank several times a month, an agent could ask, “Would you be interested in text updates of your account balance?” Better still, this service could be offered free to the end user and paid for by the bank. The operator becomes a channel for bank products.

Clearly, this requires technological and business model development, but it also requires cultural change. Operator call centres need to focus on the quality of the customer interaction, not just on the number and duration of interactions, the key metrics of today’s call centres.

  • Change the brand promise: Most operators, particularly in the mobile space, have focused brand building around product innovation. But operators are not strong innovators, so brand investment is at odds with reality. Operators should focus their brands on trust – as the top retailers do and banks until the recent credit crisis. “We are an operator you can trust to bring you the right product and service, and customer care to meet your needs” is a much stronger message for a ‘telco supermarket’. Be open and honest with customers and become the trust mark for online services, just as a Visa or Verisign logo assures safety. Customers should feel comfortable that a product or service is fit for purpose when they buy it from their operator.

Underpinning these steps are capabilities such as analytics, local market intelligence, loyalty schemes and identity management.

For some operators that lack the skills or scale to build a customer intimacy business, it may make sense to reduce or exit the own-brand retail channel. This is particularly the case for operators that specialise in the Telco 2.0 wholesale platform, which provides services to the retail customers of other operators.

Recent years have seen a stampede towards triple and quadruple-play offerings of fixed and mobile voice, video and data. Most service providers recognise that the current pricing bundles are insufficient, but moving towards service integration is proving difficult. Even simple, early examples, such as BT Fusion in the UK, have not been very successful. Most operators seem to be trying to build complex integration between the media and telephony industries. This is misguided. Below we describe the retail issues and later we will examine the complementary wholesale changes that are necessary for success.

Voice and SMS services need to integrate with the online world7: The most important change is to focus investment on connecting people, using personal communications products, rather than on media content, information services or entertainment. The next wave of growth has yet to pick a definitive buzzword – it might be ‘mobile social networking’ – but the engine of telecoms has always been the desire of humans to be social and to converse. Yet voice and messaging products have stagnated and, if this continues, users will turn to non-telco products that better fit their needs.

For personal communications, value is migrating away from the metered minute towards:

  • Helping the right people rendezvous at the right time, perhaps using presence or IM to co-ordinate when a call starts
  • Being able to collaborate and share experiences, for example seeing the same picture or web page
  • Transacting money or information during a conversation using automated tools, not manual dictation
  • Using call detail records and other data from a call to inform other processes, such as reputation systems or scheduling algorithms.

Business models turned upside down: Value shifts to three new areas


Telcos are not in a good position to create and market innovative new voice and messaging services on their own. Voice, text and video messaging will be features of broader personal communications and productivity tools.

Where will these communications tools be found? The web, of course. The key to accessing new retail revenues and increasing customer satisfaction is partnership with online services. Operators must assemble a portfolio of partners and use existing voice and messaging products as a focal point around which services such as shared voicemail, address book, presence and preferences can be integrated. Simple services that work, are conveniently packaged and can be easily bought as part of an unmetered bundle. At the moment, we are a long way from this, but  we have seen the first inkling of operators starting to move on to the web with Vodafone’s recent application, Vodafone Connect to Friends, which enables Facebook users to send text messages from their Facebook page.

Video delivery is a wholesale capability, not a retail user product: The problems of video delivery8 require a new approach. STL does not believe IPTV or mobile TV can be significant growth drivers. These approaches replicate analogue TV and miss the rapid evolution of the critical aggregation function. They also resemble the closed online content portals of the 1990s that were swept away by the open internet. Trying to keep control as a gatekeeper does not work. Telcos cannot keep up with the speed of innovation and will not have enough revenues to match the rapidly evolving interactivity of internet TV. In the battle between internet TV and IPTV, the former will win.

The exception is an IPTV system that uses fibre for distribution, replicating the cable system of broadcast down one wavelength. Obviously, this requires substantial infrastructure investment and pits operators directly against cable and satellite players. It also requires operators to be skilled media players and to back the right content on their closed platform – skills that BSkyB and the cable companies have been perfecting for 10 years or more.

We prefer a different approach that allows operators to work with, not against, over the top aggregators and retailers. Operators should become open wholesale platforms that support a wide range of partner products. Telcos will make money from partners who use the wholesale distribution platform, in the same way as Akamai makes money from its content distribution solution.

Data needs more than the simple ISP product: There are three core forces pushing for change in the delivery of data services. These can be summarised as:

  • A huge corporate market that creates spill-over into the residential market. For instance, ISPs should be offering managed residential virtual private network (VPN) products so that home workers can work securely. Latency is low, service levels are high. The home office is a growth area, but there is a big disconnect between what users need for entertainment and family use, and getting work done. The latter is more important and offers higher margins.
  • Users who are seeking a connected lifestyle, but who are being sold a disjointed series of access products, such as fixed access, mobile access and Wi-Fi access. Provisioning needs to occur at different levels:
    • A data service that follows users regardless of their connection. So, when someone plugs a laptop into a hotel network it works with no splash pages or credit cards.
    • Finer-grained provisioning so users can buy individual connected applications, such as navigation on an internet tablet device.
  • The desire by users to use cheaper and more reliable fixed networks in place of mobile wherever they can. In the home and office environment there will be a strong incentive to offload mobile data onto the fixed network. There will not be such a thing as a purely fixed or mobile ISP, both must work in tandem. The winners will be those that develop the edge assets and business models to enable this.

Key actions to create a better retail business

  • Improve your retail offering by emulating leading retailers such as Amazon, Carrefour, Tesco and Ikea:
    • Develop a broad selection of partners and products to increase the value of your portfolio to end users.
    • Make your products very easy to search and evaluate, include user reviews and recommendations to help customers choose.
    • Reward your customers for loyalty and sharing data, information, views and recommendations with you. Adopt a permission-based marketing approach that rewards customers for contributing to the success of the telco’s retail, wholesale and value-added services platforms.
    • Invest in analytics and business intelligence so that you better understand how customers are behaving, why they are behaving in particular ways and what can be done to serve them better. Automate this process, do not rely on focus groups and market research. Let the customer and network data give you the answers.
  • Update your processes and product pipeline gating criteria to reflect new priorities. In particular, build in targets for new products to encourage user participation in the platform via feedback and reviews, and the acquisition of new customers. Also, develop a target for new products to reward end users for participation – perhaps discounts, offers, tangible improved service delivery or customer service – and promote these rewards to end users.

Develop richer, customised wholesale products

Many of the shortcomings of the voice, video and data components of triple play can only be improved by creating new kinds of wholesale product. Today, most telcos offer bulk wholesale products, such as high-capacity leased lines or voice termination, which are sold as quantities of millions of minutes. In future, a much wider range will be needed.

STL Partners sees three key changes to the wholesale business:

  • Moving access and transmission charges from retail voice, messaging and data products to wholesale products sold to the services that the user prefers. This is important as it reduces the charges made to an operator’s own retail base for the operator’s products and instead means wholesale customers pick up some of the tab.

Moving access and transmission charges to wholesale: Kindle


  • Using wholesale as a means to access customers with whom an operator does not have a relationship. The benefit here is improved distribution as an operator can get access to the customers of third parties that build their retail presence on the wholesale platform. An example of this would be where an internet player offers the voice and messaging product of an operator to its customer base as a white-label service. The operator picks up the wholesale revenue for these consumers under its agreement with the internet player.
  • Providing tailored voice, video and data wholesale products that, unlike the bulk offerings, work within the context of the operator’s existing retail relationships. Operators manage the difficult hops across access networks for the end users and provide the right solutions to meet their needs, then charge the service provider for the magic.

Who pays for the network traffic?: The most important change is to enable sender party pays data via wholesale markets. This allows content and service providers to pay for voice minutes, video delivery and data charges, and include these in charges to the end user, or absorb the charges if ad-funded. The user has no need to consider usage caps, metered usage or fair use limits. Unlike today’s ISP product, which encourages free-riding distribution by content providers, this aligns the incentives of the user, telco and content provider.

Custom voice, video and data wholesale products: Operators need a content and service distribution platform that, unlike bulk wholesale, facilitates the delivery by third parties of a wide range of digital goods and services to their own retail customers. The operators may not be providing the service, that is done by the third party, but their relationships with the end user enable them to add value to the interaction. The media companies that want operators to distribute their services will pay to access those telco customer relationships and related assets, such as home hubs and set-top boxes. We have seen this in a very restricted form so far, either limited to web content, for example i-mode, or as one-off integration efforts. There is no platform commonality or interoperability across operators.

For voice service the telco needs to facilitate third-party applications to package up and sell minutes as part of a service offering. This is different from an MVNO, where the third party takes over the customer relationship. Instead, third parties can adopt voice as just one facet of their service. These wholesale offers allow price discrimination between different classes of users or partners. This can be done via contractual rather than technical means,  something that cannot be done so easily on the retail side.

Future voice wholesale example:


Likewise with video, the ultimate goal is to encourage online services to work in co-operation with the telco, rather than going over the top. This needs to be done with carrots, not sticks, by providing a more flexible network that offers more options, reduced cost and improved user experience. This may be easier than it sounds, as many of the existing players in the value chain, such as broadcasters, are struggling with online video delivery and would eagerly embrace a more co-operative approach from telcos. After all, they are already paying Akamai, Limelight and others for improving content delivery and operators have the scope to do more.

We cover the video distribution opportunity for operators in detail in the STL report, Online Video Market Study: Options and Opportunities for Distributors in a time of massive disruption, but a brief summary of the key actions operators need to take includes:

  • Make content delivery cheap and efficient: Build Content Delivery Networks (CDNs) and cache content close to the edge. Participate in forums to make peer-to-peer (P2P) delivery more network-aware. Give third parties access to the capabilities of edge devices, particularly those sold through the telco, such as home hubs, set-top boxes and network attached storage. A content partner should be able to query how much free space is available on hard drives in the home and use it to pre-cache data. There also needs to be a menu of choices of content delivery, for example off-peak data, not just premium options like assured quality of service streaming.
  • Help content providers maintain a sustainable economic model: Make it easy for content providers to charge to the telco’s monthly bill, or offer an ad-funded model with the telco using its customer knowledge to target ads, or offer separate per-megabyte charges for delivery to the user for specific partners or applications. Then offer the billing and collections service on behalf of the third party.
  • Police the illegal stuff: Content owners and established aggregators and broadcasters are suffering not only because their business models are under pressure, but also because wide-scale fraud is being committed on the web. Illegal downloads of music and video being offered by several of the new aggregators and operators have turned a blind eye to this practice. Why? Because these downloads provide welcome pull-through for broadband access sales. But with broadband now reaching saturation, the continued growth of rich media streaming and downloads is putting pressure on the ISP business model. One way to control these costs is to work with content owners to clamp down on piracy. This can be done both with end users – letters telling them to desist or risk having their service terminated – and, more importantly, with the suppliers of illegal material. This will reduce costs for ISPs but, more interestingly, content owners and aggregators will pay operators to fulfil the role.
  • Market to the base: Telcos know who is using P2P to download music and video. More than that, they know who is downloading what music, which film and so on. Music and video fans will buy relevant offers from operators. In addition, retailers, aggregators and content owners will pay operators to deliver relevant marketing of their products and services to these people – a two-sided opportunity.

Necessary short-term activities are:

  • Getting core and access network ready for these options
  • Selling edge devices, for example network-attached storage, that create the capabilities that media partners need
  • Updating billing systems to cope with a mix of retail and wholesale data charges
  • Taking control over pipes and some responsibility for the content flowing through them. Expect to have to put in place age or parental controls and, rather than a porn site asking “are you over 18?”, the ISP account holder will need to authenticate himself or herself before content is delivered.

For data, too, the situation is similar. For example, fixed telcos need to think about how they can offer backhaul services to femtocells deployed by a number of retail mobile operators.

One additional wholesale capability unique to the broadband data product is to return control to users. Deep packet inspection and traffic shaping have got a bad reputation because they have been covertly used by ISPs to give users something less than what was apparently being sold. Operators have control over streams, even if, in practice, this power is exercised on the users’ behalf and provisioned by their online service providers. Make life easier for users by giving them, or their online service providers, the tools they needs to carve up bandwidth and allocate it to where it is needed. The operator can, if it wants to, charge the service provider for this. This is the inverse of the traditional telco approach to traffic management, which uses technologies such as IMS and would require every consumer electronics device to have an embedded IMS stack to talk an obscure telco protocol.

Key actions to achieve richer wholesale products

  • Considerably enhance your wholesale product portfolio as this is the new growth engine:
    • Work hard to increase the volume of SMS wholesale products, such as short codes and pSMS.
    • White label voice and messaging products for sale via non-telco channels, particularly the internet.
    • Support industry efforts to implement sender party pays data for rich media applications. This is an important move as it re-establishes the link between revenues and costs. As costs increase with rich media streaming, for example video, so revenues rise as operators are paid by content providers and retailers for delivery.
    • Develop new wholesale products to capture value as local access points continue to be developed. For example, as a fixed operator, develop a wholesale product for the backhaul of traffic from femtocells as they are deployed in offices and homes.

Support third-party business processes

Telcos are not dumb pipes as all have valuable assets beyond their transmission networks. They have a broad range of customer data assets and customer relationships that give them implicit permission to contact and interact with the customers. Both businesses and governments constantly interact with the public via telco voice and messaging products, portals and payment systems. Rather than trying to raise revenue directly from users by creating new services, telcos can use these assets to make B2C and C2B interactions more effective and more efficient, ergo better and cheaper.

There are seven generic business process areas that telcos can service using their platform service capabilities9. In each case, the telcos are optimising business processes:

  • Identity, authentication and security: Manage customers and their transactions securely
  • Advertising, marketing services and business intelligence: Profile and target specific customers, ad delivery
  • E-commerce sales: Complete the sales transaction
  • Order fulfilment offline: Manage delivery of physical goods
  • Order fulfilment online of e-content: Manage delivery of electronic goods
  • Billing and payments: Bill customers, manage credit and collect cash
  • Customer care: Post-transaction support.

Value-added services platform: Supporting the value chains of other industries


There are three key enablers for these value-added services:

  • Identity management: This acts not only as a capability that can be sold directly, but also as a foundation stone for all other value-added services.
  • Communications-enabled business processes (CEBP): This is where operators use their existing core products, voice and messaging, to take friction out of every day business processes. An example might be making automated calls to remind people to pay their non-telco bills, or to tell someone a parcel delivery is about to be delivered and give them the opportunity to reschedule it. Typically, the goal of CEBP is to reduce the lag in business processes, eliminating wasted labour and costs, and reducing working capital and inventory. It is lean thinking applied to the economy at large. In future, we see telcos being able to offer a wide variety of value-added CEBP services that offer significantly higher margins than, for example, today’s voice and SMS termination fees. For instance, a telco could offer the ability to deposit voicemail messages as Voice XML documents with embedded interactive voice recognition, rather than just delivering a stream of audio bytes. The customer can then hear ‘Press 1 to reschedule this delivery’, rather than ‘Call us on 123-456-789’, which the customer will not bother to do.
  • Agent-based software technologies: The data that the telco holds is highly sensitive and private, which makes it difficult to use in business processes serving third parties. The web services model assumes the data is transferred to where the business process is executing. There are two dangers in this:
    • To the privacy of consumers who do not want data about themselves passed around between companies. This position is also enshrined in law in most jurisdictions.
    • To the telcos’ new, two-sided business model. Operators will not be able to charge upstream service providers for this valuable data if they give it to them. There will always be a Google out there that will take the data and use it to compete directly against the operator.

Our agent model reverses the web services procedure. Business processes are executed inside the telco where the data is held. For example, a call centre might delegate outbound call distribution to the telco, which has the relevant presence, availability and location data. The telco initiates calls and, upon answering, connects the user to the call centre. At no point is the call centre given direct access to the user’s real-time contextual data. This mimics the success Paypal has enjoyed with payments. Paypal holds financial data about both the consumer and merchant, but does not reveal this data to either party. It manages the transaction by working with both financial institutions and both of the transacting parties keep their data safe.

The key idea here is to allow the third party to place flexible business rules behind the telco firewall. For example, automated call distribution might have rules that say ‘Do not call people in the Hawaiian time zone except during business hours in the region’. Rather than producing an API for every possible combination, the telco executes a piece of software supplied to it by the third party and the piece of software would has access to the time zone of the recipient, who could be someone with a Detroit area code roaming in Hawaii. The business rule comes to the customer data, which results in an action, but the data never leaves the telco

Key actions to support third-party business processes

  • Develop a handful of pilot projects to test the two-sided opportunity with upstream and downstream customers and:
    • Build credibility in the market and internally
    • Road test demand for one or more service capabilities
    • Capture platform functional requirements
    • Validate business models and pricing
    • Create basis for volume estimates.
  • Develop a 12 to 18-month plan to realise the B2B2C value-added services platform opportunity:
    • Develop a joined up strategy and business case for the new value-added services business. Recognise that no individual service capability, including advertising, marketing and business intelligence, or vertical industry is likely to be sufficiently large on its own. It is the combination of service capabilities across several industries that makes the opportunity interesting.
    • Engender board level support for the two-sided business model that underpins the value-added services platform. Without support from the top, any initiatives in this area will fail.
    • Create a separate, dedicated organisation to avoid the new business from being destroyed by the mother ship.
    • Build the key downstream capabilities: CRM, data mining and data protection/privacy to support the value-added services business.
    • Build the upstream capabilities: aggregation, distribution and integration partners.
    • Establish a process for operator collaboration. Recognise that this is an industry opportunity that requires several operators to engage to build value for all.

Create new two-sided markets

The growth opportunity is to make money from upstream customers that wish to interact with the telco retail customer base. The obvious corollary is that you need access to retail customers: either your own; those of third parties enabled by your own wholesale platform; or those delivered via interconnect-type agreements with other telcos. We noted earlier that this forms a two-sided market. There are some additional points to note:

  • To maximise participation, a two-sided market needs careful balancing of how much you charge each side. It may be necessary to lower charges on, some retail services, o even give them away. In return, user permission to participate is gathered and customers’ otherwise private data drives the high-margin upstream services, such as voice/messaging or CEBP. Operators will need to consider value across both sides of the platform and not simply focus on end user pricing and ARPU.
  • Telcos need to work through a network of intermediaries to develop this market. Transaction networks and aggregators will provide the upstream parties with a single interface that spans many telcos. The trick is to get the right balance between the intermediary creating value for the ecosystem, without being able to collect monopoly rents and subjugate the telcos. This problem has already been faced in telecoms with services such as voice and SMS roaming. It has also been seen in other industries, such as payment networks for credit cards and their relationship to issuing and merchant banks.10


STL Partners’ research suggests that building a Telco 2.0 business is viable if significant change is made to both the telco’s business model and its cultural approach. Telcos that grasp the opportunities of Telco 2.0 will take a new position in the market at large and will identify new growth and revenue streams. Those that do not move on to the new opportunities of Telco 2.0 may, in the long term, find it difficult to survive in a retail market characterised by pricing pressure and demanding innovation.

Telco 2.0 is a mix of one and two-sided markets, with a clear switch to put users in control of what they get and how they get it. The need to create relationships with users whereby they are actively involved in platform processes is critical. Operators must appreciate that their customer relationships are very important and that the survival of their future retail business will depend on their ability to foster customer intimacy. That does not mean operators must provide every service, as there is also great value in integrating voice and messaging into other companies’ products and services. Equally, there is great value in enabling other companies to provide their services better. Here, the operator acts as the enabler, for which it may get little credit (either monetary or brand loyalty) direct from the end user, but for which upstream companies will be willing to pay.

Operators have many touchpoints with end users – retail stores, fixed and mobile portals, bills, call centres – but little attempt has been made to involve them so that they contribute to the efficiency and effectiveness of the value-added services platform. STL will explore how this can be done in more detail in a forthcoming report, Digital Kids, How Today’s Kids will Change Tomorrow’s Telcos,  that will be published in January 2009.

Part 4 – Further information

Further Information

For further information about any of the following products and services, please contact our Commercial Director, Andrew Collinson on or +44 (0)7802 587260.

Strategy Reports

Telco 2.0™ strategy reports address key Telecoms Industry strategic challenges.  Each report contains more than 150 pages of detailed analysis and insight, numerous case studies, reviews of winning and losing strategies, and short, medium and long-term action plans for Telcos, Vendors, Investors, and their business partners. Single, Group, and Corporate Licenses are available, as are collective subscriptions.  The current portfolio consists of:

  • Voice & Messaging 2.0
    “What to learn from – and how to compete with – Internet Communications Services”
  • Digital Kids
    “How today’s kids will change tomorrow’s Telcos” (Publication: January 2009)

Subscription Service

This Briefing is the first of, and introduction to, the Telco 2.0 Executive Briefings that articulate the detailed opportunities and strategies provided through our Subscription Service.

Telco 2.0™ Subscription Service Package includes:

  • A minimum of 15 x 30+ page briefings issued throughout the year to keep you fully briefed on the very latest in leading thinking and industry practice
  • Access to Telco 2.0™ analyst support so that you can validate assumptions / discuss key thoughts and options
  • A full list of Briefing reports is available online and includes:
    • Telco 2.0: A new role for Telcos in the Digital Economy
    • Introducing Two-sided Markets
    • Voice and Messaging: User Needs and How to Meet Them
    • Online Video Distribution: Three Scenarios for the Future
    • A Framework for Business Model Innovation

Individual Briefing reports are available for purchase separately.

Interactive Workshops

We create and run tailor-made client workshops around key Telco 2.0™ topics which we run either within our client’s organisations, or with a mixture of our clients and their customers. These sessions help to formulate strategy, agree plans, and create shared visions based on a thorough understanding of the future business environment and partners’ business goals and models.

These sessions use the Telco 2.0™ research, other bespoke materials, and client inputs in conjunction with our “Mindshare” technology. Outputs include full data from the sessions plus Telco 2.0™ commentary.

Consulting and Advisory Services

STL Partners provide advisory and consulting support to companies developing their strategy in key Telco 2.0™ areas. Our expertise is around business model innovation – new ways of making money in the Digital Economy. Please contact us for more information.

STL Partners consulting


1 See Telco 2.0™ Briefing Report March 2009  for more detail.

2 See Telco 2.0™ Strategy Report Future Broadband Business Models, April 2008  for more detail.

3 “Future Broadband Business Models – Beyond bundling: winning the new “$250Bn delivery game”, STL Partners, April 2008.

4 “The 2-Sided Telecoms Market Opportunity – Sizing the new $125Bn Platform Services Opportunity”, STL Partners, April 2008.

5 “Telco’s Role in the Advertising Value Chain – How to make the Telco Advertising Channel work for Brands and profitable for Telcos”, STL Partners, 2007.

6 “Content Distribution 2.0 – Fixing the Broken Online Video Distribution Chain”, STL Partners, December 2008.

7 “Voice & Messaging 2.0: What to learn from – and how to compete with – Internet Communication Services”

8 “Content Distribution 2.0 – Fixing the broken Online Video Distribution Value Chain.”

9 “The 2-Sided Telecoms Market Opportunity – sizing the new $125Bn platform services opportunity”

10 See Telco 2.0™ Strategy Report The 2-Sided Telecoms Market Opportunity, April 2008 and Telco 2.0™ Briefing Report Introducing 2-Sided Business Models, December 2009 for more details.

Full Article: A Quick Slick Unpick of Blyk’s 2-Sided Business Model Trick

The title is Doctor Seuss’ fault as his rhymes are lodged in this writer’s head after years of reading them to his children:

Look, sir. Look, sir. Mr. Knox, sir.
Let’s do tricks with bricks and blocks, sir.
Let’s do tricks with chicks and clocks, sir.
First, I’ll make a quick trick brick stack.
Then I’ll make a quick trick block stack.
You can make a quick trick chick stack.
You can make a quick trick clock stack.

We thought it might be helpful to review the Blyk business model in a bit more detail following our pre-launch analysis where we were bearish on the company. Its business model ties in nicely with our 2-sided strategy for operators about which we have written on numerous occasions on the Telco 2.0™ blog

This piece, therefore, seeks to answer the following questions:
1.How does Blyk make money?
2.What are the benefits and risks of the business model? (Are we still bearish?)
3.What are the broader ‘Telco 2.0’ lessons for other operators?

News Glorious News

News flow from Blyk has been positive recently. It announced a few weeks ago that it has reached 200,000 customers in its first year of trading (versus its target of 100,000). This follows press releases in June that the company is set to expand operations in 2009 into other European markets, notably the Netherlands, as well as Belgium, Germany and Spain. All this follows investment (of an undisclosed amount) from Goldman Sachs and IFIC in January. The current squeeze on credit can hardly be helpful to an expanding start-up, but it looks like Blyk was lucky in securing funds ahead of the summer problems.

The Blyk Business Model

Blyk is an ad-funded MVNO focused on the 16-24 year old market (although they position themselves as a ‘media company’). It gifts minutes and texts to customers in exchange for the right to send advertisements to them. Users complete a set of questions about themselves when they sign up, giving Blyk information about their preferences. Advertisers market their products and services via text to Blyk users based on this profiling and Blyk gets paid to deliver the advertisement. So, at first glance, Blyk reverses the normal revenue model for operators: it collects money upstream and pays out for delivering services to customers:


But this is too simplistic (and many who have commented on Blyk’s business model have been guilty of this) because Blyk actually makes money from both sides – from end users as well as advertisers:

1.Termination charges from off-net callers. This is effectively shown in the lower diagram of the chart above where we show operators as both receivers of money from end users (when originating the call) and receivers of money from other operators (when terminating the call). So every time a Blyk user receives a call or text from an off-net customer the originating operator pays Blyk for termination. In turn, Blyk obviously pays some of this termination charge out to its network supplier (Orange) but we guesstimate that the company still makes some margin on this.

2. Overage. Typically 16-24 year olds, like the rest of us, have a pre-determined communications budget – “I will spend £x on my phone each month��?. The fact that Blyk gives users free calls and texts does not stop users from spending this money. Blyk’s users will simply display the same behaviour that every Telco exec is familiar with: increased communications usage as the price reduces (see this excellent piece on elasticity and pricing from the Ericsson Business Review). Because Blyk offers 217 free minutes and 43 texts, we believe that users will be profligate with their communications. They will use this free allowance up and STILL spend at least some of their previous budget.


So how much revenue and margin does Blyk make? Well, we developed a model of the company and plugged in the following assumptions:

Usage Assumptions (Average per User per Month)

Makes 230 texts (13 more than 217 limit) Makes 50 minutes of calls (7 more than 43 limit)
Makes 5 minutes of voicemail calls (all above limit)
Consumes 1MB of off-portal web browsing
Receives 100 texts
Receives 50 minutes of inbound calls
Receives 120 advertising SMS
Receives 30 advertising MMS

Pricing Assumptions

Calls to any UK mobile network or landline (over and above free): 15p/min Calls to Blyk voicemail: 15p/min
Text messages to UK mobile networks (over and above free): 10p each
Browsing off Blyk portal: £1 per MB
Price charged to Advertiser per SMS: 7p
Price charged to Advertiser per MMS: 22p

Cost Assumptions

Off-net texts are terminated at 3p each On-net texts are terminated at 2p each
80% of outbound texts are off-net
Off-net calls are terminated at 5.1p per minute
On-net calls are terminated at 4p per minute
80% of calls are off-net
Off-portal browsing costs £0.50 per MB
On-net MMS are terminated at 9p each


Our analysis suggests that, by combining user and advertiser revenues, Blyk could be making as much as £26 in revenue per user per month at a gross margin (defined as revenue less network costs only) of around 28%:


In other words, Blyk makes around 2/3rd of its revenue from upstream customers (advertisers) and 1/3rd from users (overage and inbound):


It is worth pointing out that Blyk has, thus far, been pretty successful at (a) attracting advertisers and (b) managing campaigns. In fact, response rates over a four week period of 116 campaigns were a staggering 29% last year towards the end of 2007:


29% compares very favourably to other forms of digital advertising (Source: e-consultancy, September 2007) and suggests both that young people are open to this value exchange (receiving ads and giving information up about themselves in exchange for free communications) and that even basic targeting is effective:

* On-line Advertising 0.02%
* Paid Search Advertising 0.2%
* Email 0.1%
* Direct Mail 2.0%
* Magazines 0.2%
* Direct Response TV 0.04%
* Radio 0.01%

Benefits and Risks of the Business Model

There is a lot about Blyk’s business model to admire. Compared with a traditional one-sided mobile operator Blyk has the following strengths:

Higher ARPUs. By introducing a second revenue source, Blyk can potentially more than double the ARPU levels achieved by a traditional one-sided player.

Strong appeal to advertisers. Response rates appear to be so good that advertisers cannot fail to be impressed with the Blyk platform as a means of communicating with a traditionally ‘hard-to-get-at’ segment. They certainly seem to have signed up plenty of high-profile brands including WDK (drinks), Penguin (books), Sky Box Office (TV), Local Government (elections), Brylcreem (male grooming products), Boots (Retail). There are lots of examples on the Blyk media portal.

Strong appeal to youth market. Students on a tight budget will be seeking value for money and Blyk offers this in spades in return for relatively limited intrusion (users receive a maximum of 6 ads per day).

Speed to market. The simple approach to targeting (capturing user preferences when they sign up) is not particularly sophisticated and certainly way short of providing real-time behavioural targeting but it has allowed Blyk to launch and grow quite quickly – no operator has yet launched anything similar.

However, as we pointed out before, there are large risks for Blyk. Specifically:

Network pricing. Because it is an MVNO, Blyk is to a great extent dependent on the prices charged by operators for network usage (for origination, transmission and termination). In a competitive market like the UK, these are unlikely to be excessive but there is a margin risk for Blyk if these rise. Blyk would presumably be able to pass on the increase on the revenue it generates on inbound minutes and text but this would not be enough to offset the margin hit. In our model, we calculate that a 10% increase in network costs would see gross margin drop from £7.27 per user per month (28%) to £5.95 (22%).

Declining response rates. A 29% response rate is mighty impressive but this figure is likely to come down as the initial enthusiasm for receiving advertising diminishes and as Blyk penetrates more deeply into this segment and captures users who are less wedded to the ad-funded model. This has two potential impacts:

It may make advertisers less inclined to use Blyk which would reduce the premium prices that Blyk can charge advertisers for SMS and MMS messages.

It will impact the number of SMS and MMS messages sent over the course of a campaign which could have a substantial impact on advertiser revenues. To illustrate this, suppose that Blyk conducted a SMS campaign for an advertiser to 20,000 of its user base and achieved a 29% response rate overall (additional messages are sent only to those who respond up to a maximum of 3). We calculate that such a campaign could be worth £2,345 to Blyk. However, if the response rate drops to 10% (still quite high), then Blyk’s revenue drops by nearly 30% to £1,694:


Given that advertisers account for nearly 2/3rds of Blyk’s revenue, this would equate to a 18% revenue hit overall (assuming stable subscriber numbers).

Operator competition. To date, no operators have followed Blyk into the youth market with an ad-funded model. But if Blyk shows signs of success, you can be sure that other operators will look for a piece of the action. Orange, Blyk’s network provider, has a youth skew and if it sees ad-funding as providing incremental value (rather than cannibalising subscriber revenues), then they are likely to follow suit. And Virgin also has a strong youth bias and could potentially copy the Blyk model relatively easily. Moves such as these are likely to drive prices down for advertiser media purchases.

Scalability. Even if Blyk could capture a large proportion of 16-24 year olds (which seems unlikely in saturated and competitive European markets), the cost Blyk spends on acquiring customers is likely to mean that EBITDA margins will be razor thin. Our 28% gross margin excludes operations, customer care (where it looks like they have had some problems) and marketing and sales costs. The latter is particularly concerning since Blyk uses people at university campuses to sign up prospects and capture profile information. This simply doesn’t scale effectively and the sign-up and data capture process will need to be automated as Blyk grows to improve both efficiency and the effectiveness of targeting.

Growth – eats itself. Ironically, it is because Blyk is so small that we calculate that 25% of its revenue could come from inbound termination of off-net calls and messages. If the company grows and more and more call and texts are on-net, Blyk continues to pick up the costs without the associated termination benefit. Like the voice arbitrage players, that make money by using the internet to reduce voice and fixed calls, it is to some extent a beneficiary of its small size for if it grows it loses a key revenue stream.

Lessons for Operators

1. 2-sided market opportunity is real. Perhaps the most obvious lesson for other operators is that there is value in 2-sided markets! Blyk may struggle to make a return for the reasons mentioned above, but it has already done enough to show that for operators with large existing (youth) customer bases the ad-funded model could be fruitful. We think this also shows the wider potential for 2-sided opportunities in the areas outlined in our report on the subject.

2. Different Business Model = Different Business! It is not mere marketing fluff that Blyk refers to itself as a media company rather than a MVNO. It shows that Blyk’s management considers the advertising community as its primary market and end users as ‘members’ rather than customers. This is important – a different business model is a different business. A two-sided approach for operators will require new customers, new metrics, new operational procedures and processes, new skills and assets (see below). It will be very, very difficult to build this within the existing organisation structure and operators should consider carving out the new unit and making it a customer of the core business.

The core business could even charge the new unit for using the customer and network data and other assets it requires for success. The ‘differentness’ of this future business was brought home to me recently in a meeting with two strategy executives at a leading European mobile operator who said that one of the key barriers to developing a two-sided business model is the current metrics used for business planning. Unless projects are shown to replicate the 40-50% EBITDA margin enjoyed by the current business, they fall at the first hurdle. The two-sided business is likely to be much less capital intensive than the current business so, while it may not generate such high EBITDA margins, EBIT margins could be equally impressive. .

3. Scale for success. We have oft pointed out the need to build scale on at least one side of a platform. I was delighted to see a media agency also voicing this recently when Grant Miller, joint MD of media agency Vizeum, explained why they had chosen AOL’s Platform-A for promoting Oasis’ new album:

“We need a property that has scale, tools and the technology to build a communications platform that delivers on all fronts. By bringing together all its individual properties, Platform-A represents a great opportunity to build a dialogue with the target audience.��?

Blyk has done well from a standing start and its 200,000 users are clearly attracting brands.

The real value to advertisers (and merchants, governments, developers, enterprises and other upstream customers) is from seriously large numbers of end-user customers willing to accept advertising and other telco-enabled VAS services. This makes the 2-sided telco opportunity most valuable to larger operators OR the operator community working collaboratively.

4. The power of a 2-sided pricing strategy. Blyk isn’t the first company to give stuff away. Google gives 99% of its products and service away to end users and Microsoft gives away its SDK for Windows to developers. What these companies do is subsidise one side of the platform and charge a premium to the other and thus seek to maximise value across BOTH sides. In Google’s case, its efficiency means that it can undercut other advertising channels’ prices and still make a handsome return. The ability to understand and use such a pricing strategy makes 2-sided players tremendously powerful as they can attack the markets of competitors that charge for services that they give away.

5. Cost control remains king. You’ve got your customer base on one side and you are building scale on the other side, so you’re sorted, right? Absolutely not. The platform will only thrive it not only provides an effective service (identification, authentication, advertising, billing, content delivery, customer care, etc.) AND does it more cheaply than can be found elsewhere. Google is winning because advertising is cheap for brands, Microsoft won on Windows partly because the platform, when bundled in with a PC purchase, was negligible. This means that driving costs out of the platform is critical. The high-cost nature of Blyk’s sales model and customer data acquisition is a worry and other operators looking to enter the market should seek to ruthlessly drive cost out of the system.

6. Customer data and CRM is core. Even with its relatively low-tech data acquisition approach, Blyk shows that targeting customers with the right message/product/service/solution really does work. Operators should seek to invest heavily in this area whether they pursue a 2-sided strategy or not because understanding their customers better can only improve the delivery of their own retail services anyway. A strong CRM capability becomes a must-have if they wish to become a platform player like Google.

Finally, what is Blyk’s plan for the emerging world of Voice & Messaging 2.0? After all, its target demographic is made up of exactly the same young early-adopter kids who most of the new V&M players are targeting; but its product isn’t really geared to that. For example, they’re keeping a tight grip on the data pipe, and it’s 2G only. And there’s no sign of a developer community.

However, Blyk does have capabilities most MVNOs don’t – it has its own complete Nokia Siemens Networks-provided core network, not just an HLR plugged into a partner’s network. So, how long before there’s a Blyk API to play with? Or do they fear cannibalisation too much?

Beyond Bundling: Growth Strategies for Fixed and Mobile Broadband – “Winning the $250Bn delivery game”

Summary: This report examines future retail and wholesale business models for fixed and mobile operators offering high speed packet data services. This includes – but is not limited to – providing Internet access.

The report charts the next 10 years for fixed and mobile telecoms network operators as the viability of the current broadband business model is threatened by intense competition and falling prices in maturing markets, changing usage patterns, and the adaptation of new technologies. The report identifies and profiles a new $250Bn content delivery market opportunity. (April 2008)

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For more on any of these services, please email call +44 (0) 207 247 5003 

Future Broadband Business Models Series

This report examines future retail and wholesale business models for fixed and mobile operators offering high speed packet data services. This includes – but is not limited to – providing Internet access.

The report charts the next 10 years for fixed and mobile telecoms network operators as the viability of the current broadband business model is threatened by intense competition and falling prices in maturing markets, changing usage patterns, and the adaptation of new technologies. The report identifies and profiles a new $250Bn content delivery market opportunity.

  • Report Summary
  • Key Points
  • Who is this report for?
  • Business Context – The Changing Face of Broadband Distribution
  • Key Questions Answered
  • Case Studies, Companies, Services, Technologies & Applications Covered
  • Forecasts Included
  • Summary of Contents
  • Pricing and User Licenses
  • Customer Workshops
  • Team Biographies
  • Fit with other Broadband Reports
  • Other Reports

This study is supported by BT, GSM Association, the Broadband Stakeholder Group, the TeleManagement Forum, and Telecom TV.

Report Abstract

Intense competition and falling prices in maturing markets coupled with the challenges presented by changing usage patterns and the adaptation of new technologies are all starting to threaten the viability of the current broadband business model.

This report reviews the pain points in current operational scenarios, case studies of successful strategies and emerging new entrants, and profiles the key threats and future opportunities to the industry. It outlines a number of key steps to develop business models that can be viable in the evolving marketplace, and touches on the future of core Voice & Messaging revenues, Video Distribution, P2P technologies, the Next Generation Network, E-commerce Value Added Services, and more. The report identifies and profiles a new $250Bn market opportunity.

Key Points

  • Pain points in current operational scenarios.
  • Case studies of successful strategies and emerging new entrants.
  • Threats and future opportunities to the industry.
  • Steps to develop business models that can be viable in the evolving marketplace.
  • The future of Voice, Video Distribution, P2P technologies, the Next Generation Network, E-commerce Value Added Services, and more.
  • New propositions, channels and partners for telco operators, cablecos, ISPs, NEPs, Device Manufacturers, Investors, and Public Policy bodies.
  • Scopes an attractive new $250Bn market opportunity.
  • Short, medium and long term actions required.


Who is this report for?

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

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


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

Business Context – The Changing Face of Broadband Distribution

The chart below shows how the telecoms industry today offers two dominant types of distribution systems for content and services.

  1. Vertically integrated networks, like the Public Switched Telephony Network, its mobile equivalent, Next Generation Network replacements for these, and SMS messaging (“PSTN & SMSC”). Here, a dedicated network integrates connectivity, service and payment.

  2. Internet access, where connectivity, services and payment are all separate (“Broadband Internet”).

  3. In the future there will be a wide range of new business and payment models which assemble devices, applications, content and connectivity in new technical and economic ways (“Other”). Wholesale markets will evolve greatly to support this. This original hypothesis, affirmed by our proprietary market research, is explored in depth in this report.

This study looks at the impact of this significant change on the business models of those in the broadband value chain.

Key Questions Answered

This report uniquely answers 3 key questions:

  1. “What are the business models for fixed and mobile broadband voice, video and data access over the next 5-10 years” – how will these revenue streams evolve for telcos and cablecos?

  2. “What are the future wholesale and retail business models” – managing costs and revenues by learning from outside the telecoms industry.

  3. “How to rejuvenate broadband growth strategies” – what are the new propositions, channels and partners for telco operators, cablecos, ISPs, NEPs, Device Manufacturers, Investors, and Public Policy bodies.

In addition, to help operators and vendors maximise future opportunities from broadband-based services the following questions are also addressed:

  • What are the key pain points and problems in the current Broadband Service Provider (BSP) business model?

  • What are the limitations of reliance on voice and video cross-subsidy?

  • What are new potential upstream and downstream revenue models?

  • Who puts money into BSPs today, and how does it gets re-allocated?

  • Who makes the margins today and why?

  • What are the drivers of economic activity inside and outside the network?

  • What are the competing fixed and mobile distribution systems and their relationship to services?

  • What lessons about wholesale/network business models can we learn from outside of telecoms?

  • How long are vertically-integrated service models likely to survive? What are the opportunities for new entrants?

  • What are the most successful players doing to combine multiple distribution systems to support the customer experience?

  • What are the lessons from dead or dying distribution systems (ATM, ISDN, MMS)

  • How much value will flow through new broadband distribution channels?

  • How to improve core Voice and Video services?

  • Which network ownership models will be most effective?

  • What are the economics of QoS, and how to create better alternatives?

  • What are the trends in traffic shaping and throttling?

  • What is the potential for new wholesale intermediaries to grow beyond providing backbone and interconnect peering for access networks?

What are the practical issues in taking new business models to market in a highly regulated and politicised industry?

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

Case Studies: Akamai, BT 21CN, BT Vision, e-TopUps, Illiad, Janet(UK), Joost, Kontiki, Limelight, LINX, Sky Anytime.

Companies and Services Covered: 3 UK, Akamai, Amazon, Amazon Kindle, Apple, Apple iPhone, Apple iTV, ASUS, AT&T, AT&T/Bell Labs, BBC, Blackberry, Blockbuster, Blyk, BSkyB, Carphone Warehouse, Cinema Paradiso, Cisco, Dell, Deutsche Telekom, Direct Connect, Disney, DoCoMo, DoCoMo iMode, Easyjet, Ericsson, France Telecom, Freebox, Gillette, Google, Google Phone, Hutchison 3, Intel, Liberty Global, Link, Livebox, Lovefilm, Lucasfilms, Maxjet, Microsoft, Motorola, Motorola Tetra, Moviebank, MSN, My Moviestream, Myspace, Netflix, News Corp, Nextel, Nokia Ovi, Pixar, Qualcomm, Ryanair, Scientific Atlanta, Setanta, Sky+, Skype, Slingbox, Sprint PCS, Swedish Metro, Swisscom Hotspots, Tandberg, Tesco Mobile, The Economist, Tracfone, TV Perso, Verizon FIOS, Verizon Wireless, Virgin, Wall Street Journal, Walmart, Yahoo!, YouTube.

Technologies & Applications Covered: Broadband, Broadband Video, Broadband Voice, Cable, CDMA, CDNs, Deep Packet Inspection, DSL, Edge-Caching, Ethernet/ATM unbundling, Fax, Femtocell, FON, GSM, HDD, IMS, Internet Video, IP, IP Multicast, IP Stream, IPTV, ISDN, Linksys, Linux, MMS, Mobile TV, Muni Nets, MVNO, Mxit, Netgear, OpenID, OPLANs, P2P, PAN, Peak Shaving, PSMN, PSMs, PSTN, Telex, Traffic Shaping, VoD, VOIP, VPN, Wifi, WiMax, WLAN.

Forecasts Included

For 2006-2017: Wholesale and Retail BSP revenues by Fixed and Mobile Access, TV, Data, Voice & Messaging across 12 Western European and North American markets.

Summary of Contents


Executive summary

Background to this Telco 2.0 research project

Part 1: The business model

  • A framework for business model innovation
  • Business model change in the airline industry
  • Applying the framework to telecoms business models

Part 2: Broadband service provider industry review

  • ISP industry
  • Entertainment market
  • Voice and messaging
  • Business model issues

Part 3: Wholesale and network business models beyond telecoms

  • Container shipping
  • Automatic teller machines in the UK
  • Power and energy distribution

Part 4: Competing distribution systems – theory and practice

  • Broadband as a distribution system
  • Drivers of vertical integration

Part 5: Emerging and declining distribution systems

  • CDNs: A freight service for the digital world
  • Vertical distribution systems
  • Hybrid distribution system case studies
  • Lessons from other delivery systems
  • Conclusions

Part 6: Survey results

  • Broadband video – is internet video a threat or an opportunity?
  • Broadband voice – which companies will prevail?
  • The network – what does the internet carry today?
  • E-Commerce value-added services
  • The wholesale market
  • The retail market
  • Case studies
  • Winners and losers

Part 7: Future broadband revenue models and scenarios

  • BSP market sizing
  • Wholesale market opportunity

Part 8: Conclusions

  • Beyond bundling: the quest for a new business model
  • Respondent views
  • Recommendations


  • Research methodology and respondent profile
  • Glossary

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, call +44 (0) 207 247 5003.


Full Article: Mobile NGN, a Real Telco 2.0 Opportunity?

The sixty page document “Next-Generation Mobile Networks (NGMN): Beyond HSPA and EVDO? is the latest white paper of, an initiative by the CTO’s of China Mobile, KPN Mobile, NTT DoCoMo, Orange, Sprint Nextel, T-Mobile International and Vodafone Group. It provides a technical requirements framework to vendors for the next iteration of mobile networks.

To be clear, what’s defined is just a technology toolkit. Different carriers may deploy it in different ways with varying business models and services. Until we see the business models, jubilation or damnation is premature. Nonetheless, this is an extremely important document. The “walled gardens? of 3G are starting to look like weed patches, and this is a rare chance to define a truly new Telco 2.0 approach that takes the best of the Internet and traditional telecoms models.

The document avoids wild flights of fancy about sophisticated combinatorial services, and focuses on practical implementation concerns of mobile broadband. It rightly sees the mobile ecosystem as a co-evolution of devices, access and services. This offers a valid and viable parallel/alternative path to the fragmented and sometimes chaotic Internet approach. It’s clear about what generic classes of service are to be offered, and what tradeoffs are likely to be acceptable. The document also outlines a very much evolutionary approach: business-as-usual, only faster and cheaper.

And therein lie the big questions:
* Does it go far enough in addressing the forces tugging apart network access, services and devices?
* Does it react to the counter-forces that would push them back together in order to address deep architectural issues of IP and the Internet (such as weak security and low efficiency)?

Our answer based on our reading is “maybe, if deployed right? — but you need to be a bit of a Kremlinologist to read between the lines and think about what’s left unsaid.

We’ll start with the easy bit: things in the document that make sense about Making Money in an IP world. Then we can delve into the more philosophical and practical limits of that IP world and how a next-generation architecture might address them.

Plenty to praise

There are many positive improvements proposed. Some highlights might include:

  • Self-configuring networks that cost less to run.
  • Improved scheduling algorithms that focus on user “quality of experience? at the periphery of a cell site, rather than RFP-friendly numbers for maximum burst throughput standing under the cell tower at 3am on Christmas morning.
  • Flexible and modular service-oriented architecture to accommodate future change.

Put simply, whatever NGMN turns out to be, operators want OSS and BSS thought through in advance, and for vendors to take responsibility for the operator and user experience post-installation. So far, so good.

Aligned with several Telco 2.0 trends

There are also some features which come with the “Telco 2.0 Approved��? stamp because of their reflection of the business trends we see:

  • The ability to share equipment and do more slice-and-dice of the infrastructure similar to MVNOs, but better. We believe infrastructure sharing and new modes of financing/ownership as being a key Telco 2.0 trend (as we will discuss at our forthcoming Digital Town event workstream).
  • Stronger device and end-to-end security to enable transactions of money or sensitive data. As telcos are already diversifying into the payments and identity business, this can only grow — and depends on such enabling infrastructure. DoCoMo are part of the consortium, and given their trailblazing in payments services, we’re hopeful of seeing diversification successes of operators elsewhere based on their learnings.
  • Detection and mitigation of network traffic resulting from malware or attack. This we feel will be a growth area as the services become less controlled. A limitation of the “intelligence at the edge? concept is the ability of those edges to collaborate to detect and eliminate abuse. The experience of email spam and phishing tells us that not all is wonderful in Internetland.

Moving on, there are several things conspicuous by their absence.

The Internet elephant in the corner

Apart from some in-passing references in a few tables and diagrams, the word “Internet? is wholly absent from the document. It’s a bit like Skype, YouTube and BitTorrent never happened. In fact, you can only conclude this absence is deliberate.

It could very well be that the technology defined can be deployed in very different manners, and operators may take radically different approaches — such as the contrast between 3 and T-Mobile in the UK embracing open Internet access, O2 trying to keep people on-portal, and Vodafone outright banning many popular Internet services such as IM, VoIP and streaming. Will operators want to continue to ride the “Telco 1.0? command-and-control horse, or switch to a more open “Telco 2.0? Internet-centric approach? Will the point of a future mobile network to channel bits back at all costs to a cell tower where they can contend for expensive backhaul to be deep-packet-inspected. metered and accounted for? Or will it complement the other infrastructure that exists?

The IMS mouse in the cupboard

Equally conspicuous by its general absence is reference to IMS. Our take is that there could be a polarisation here between “service-centric? operators trying to define interoperable new services and compete against Internet players; and “connectivity-centric? operators who create “smart dumb pipes? and enabling platforms for a wide ecosystem of players. You could deploy NGMN and completely ignore IMS if you chose to do so.

Local connectivity, globally interoperable

At the other extreme of connectivity, another thing not given much ink is the explosion of highly local connectivity. For example, we’ve just passed the billionth Bluetooth-enabled device. Motorola’s Chief Software Architect, John Waclawsky, described this at the last Telco 2.0 event in October in his presentation “From POTS [telephony] to PANS [Personal Area Networks]?. The mobile network itself can still play a part in this, such as offering directories of resources. If you’re sat in Starbucks today and want to print out a document, you’re out of luck — the network can’t help you locate or pay for such services.

Given that this is an integrated vision of handset, network and service evolution, we think it may be gold-plating the longhaul connectivity vision, and underspecified the local connectivity one. The business model will also need to evolve, since there may be no billable event. It has to anyway: products like Truphone will make it ever easier for users to bypass or arbitrage network access.

What’s the commercial vision?

Naturally, the operators can’t write down a collective commercial vision (because of anti-trust), nor an individual one (due to commercial confidentiality). So you have to impute the commercial vision from the technology roadmap.

The stated requirement is for a network that’s low-latency, efficient, high-throughput, more symmetrical, good at unicast, multicast and broadcast, cheap, and interoperates seamlessly with everything that went before it. It’s a bit like low-calorie cream-topped chocolate cake. Sounds like a good idea, until you try making one.

The inevitable billion-dollar question is what are the services and the business model that will pay for all this? The experience from 3G was that “faster? isn’t itself a user benefit of significance (particularly when it doesn’t work indoors!) In fact, given that battery technology follows a curve well below that of Moore’s Law (or its transmission equivalent), there’s the “oven mitt? problem of early 3G handsets still lurking: how to create hand-held devices that are physically capable of sourcing and sinking data at such speeds and over such distances (and high power) — and that create services users care about in the process.

Or, to put in another way, why sync my iPod over the air slowly when I can plug this USB cable into my laptop and do it at 400Mbps for free?

What is a mobile network for, exactly?

There’s a significant difference of expert opinion here that’s worth noting. There isn’t universal agreement on what wireless networks are best used for compared to wireline. For example, Peter Cochrane, the former CTO and head of research at BT has long been keen on forgetting DSL and copper and going all-wireless. NGMN’s ambitions to match and exceed the technical and cost capabilities of DSL suggest a commercial vision of competing against fixed access.

Our take is that success is most likely to come from intelligently blending the best of fixed, mobile and media-based delivery of data, rather than an absolutist approach to any one of these. Furthermore, the unsolved user problems are more to do with identity, provisioning, security and “seamlessness? than speed or even price. Finally, users don’t generally see the up-front value in metered or fixed buckets of IP connectivity, particularly given the anxiety it causes over cost or overage. True unlimited use isn’t technically possible, so the network has to allow connectivity to be bundled into the sale of specific device or application types, where traffic is more predictable.

Stop looking for the platinum bit

The hypothesis seems to be that some bits will be blessed with “End-to-end QoS? and continue to gather super-premium pricing (by many orders of magnitude). The need for this QoS capability is repeatedly stated. At the same time as the network capacity, latency and cost improve to near-wireline levels. I think you can spot the problem. I’ve made a successful Skype call to someone 35,000 feet up on a 747 somewhere over central Asia, and there wasn’t any QoS involved.

Our post on Paris Metro Pricing attempts to challenge some of the assumptions that drive this requirement. It sounds esoteric to those from the commercial side of the business, but ignoring this small technical detail is telecom’s equivalent of the frozen O-ring. Set the price high, and at some point all the valuable bits flow around the “premium pipe? and not through it, and the commercial model fails.

NGMN could be part of the solution here, not the problem. If operators can switch to a congestion-based mode of pricing, rather than pure capacity, they could offer users a far better deal.

What are the real sources value?

Here are some examples of requirements in the document, and how NGMN provides opportunities for product and business innovation:

  • Making user data more seamlessly accessible, blurring the line between online and offline. The specification includes
    Standardised APIs (i.e. not operator or handset-specific) to sync online and offline data like address books, so the user doesn’t have to care so much about network connection state. This whole process could be taken much further to cover all content. This lecture video by Van Jacobson, former Chief Scientist at Cisco, points to a very different future network architecture based around diffusion of data rather than today’s packet-only networks where you have to know where every pieve of data is located to find it. (Hat tip: Gordon Cook.) This isn’t a theoretical concern: wireless networks readily become congested. Maybe it’s time to reward your neighbours for delivery you the content, rather than backhauling everything across the globe. The Internet’s address space is flat, but its cost structure is not.
  • Deeper coverage, richer business models. The document talks about hub terminals (e.g. femtocells). Deep in-building and local coverage is a clear user desire. The first step is outlined, but there’s no corresponding economic model being included. Companies like FON and Iliad are doing innovative things with user-premises equipment and roaming. We nope NGMN doesn’t repeat the experience of Wi-Fi, where hooks for payment weren’t included (causing a mess of splash screens), and the social aspects neglected (am I sharing this access point deliberately?). The existence of bottom-up network deployment is an interesting possibility. You need to create new security and payment mechanisms so that local entrepreneurs can extend networks based on local knowledge and marketing. Top-down is becoming top-heavy.
  • Support for a diverse array of charging models. It’s in there, but could get lost in the deep-packet-inspection swamps. The genius of telephony and SMS is to sell connectivity bundled with service in little incremental slices. We’d like to see richer, better and simpler ways of device makers and service providers bundling in connectivity. (See out earlier artlce on this for more details.) For example, the manifest of a download application could say that Acme Corp. is going to pay for the resulting traffic — and the secure handset will ensure it’s not abused to tunnel unrelated data at Acme’s expense. NGMN could enable this.
  • Uplinks vs. downlinks. Users create as much content as they consume. Devices are equipped with multi-megapixel cameras and video capture, which will be uploaded for online storage and sharing. That media is then often down-sized for viewing (if it is ever viewed at all). Yet the standards continue to emphasise downlink performance. We’ll acknowledge that from a technology perspective uplink engineering is like trying to fire bullets back into the gun barrel from a distance. Somehow this issue needs to be looked at. NGMN takes us closer, at least.
  • Peer-to-peer. A great requirement in the specification is “better support for ‘always on’ devices, with improved battery performance and network resource usage.?. We’d second that. But given this requirement, where’s the peer-to-peer specification of the services those devices should host? Or do operators still believe that the purpose of the network remains distribution of professionally authored media entertainment from “central them to “edge us?
  • Building an identity-centric business. Another good requirement is for more advanced modes of device authentication, such as sharing a SIM among multiple devices. In some ways it defines an “identity network that is independent of the NGMN, and potentially fixes some serious problems with the Internet. Mobile networks may happen to use those identities, but they’re equals with other uses. We’d encourage more creative thinking in this area.

Summary thoughts

Overall, it’s a good piece of work. Change doesn’t happen overnight, and given a 3-5 year time horizon, the world will not be beyond recognition. Nonetheless, without a parallel vision of business model evolution, much of the investment in NGMN could become as equally stranded as that in 3G. With the right vision, it could make the “mobile Internet really work, since the “real Internet continues to be a polluted, expensive and frustrating experience for users.

The 2-Sided Telecoms Market Opportunity

Summary: The traditional business models for fixed and mobile operators are under pressure in all core products – voice, messaging, broadband access – particularly in mature markets.

A new business model is described here: one where operators make money from new types of customers rather than exclusively from end-users – and the business opportunity is potentially very large – c$125Bn. This additional, incremental revenue to the $250Bn described in the Future Broadband Business Models Report. This report is designed to help readers understand the nature and size of this new business model opportunity in its entirety.(March 2008)

What is The Two-Sided Telecoms Market / Platform Services Opportunity?


Fig 1 What is The Two-Sided Telecoms Market / Platform Services Opportunity?

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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 call +44 (0) 207 247 5003

Key Points

  • Market opportunity & market size.
  • Reviews opportunities and details market sizing by market sectors.
  • Highlights priority sectors for development and investment.
  • Defines 7 key applications (Identity and Authorisation / Advertising, Marketing Services & Business Intelligence / E-commerce sales / Online Order Fulfillment / Electronic Content Fulfillment / Billing & Payments / Customer Support)
  • Details the capabilities and assets required and available to Telcos.
  • Describes the opportunity to develop a coherent cross-market two-sided market play.
  • Fit with existing retail/wholesale market and organisation structures.
  • Key principles and strategies for success in addressing this opportunity for fixed and mobile operators.
  • Recommends specific short, medium and long term actions for moving forward.


Who is this report for?

The report is a must-have for strategists, marketers, technologists, and strategic business development professionals in operators and vendors who seek to position their company to take advantage of this new opportunity.

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


Strategists and CxOs in Media, “Upstream”, 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.

Background Context – The need for profitable growth

Thus far, operators have looked to replicate this business model in adjacent markets. Fixed operators have moved into mobile markets; mobile and fixed operators have sought to make money in fixed broadband. Operators are also charging users for new services, such as content delivery, with the launch of IPTV and mobile TV. The larger players in mature markets are aggressively expanding into emerging markets, such as China and India, where subscriber growth is still available.

But, as we have shown in the preceding report to this on Future Broadband Business Models, this activity is not enough. All mature markets are becoming more competitive and emerging market growth will slow in the next few years. A new business model is required: one where operators make money from new customers rather than exclusively from end-users. For background on the 2-sided telecoms market opportunity, click here for a short presentation.

Some operators have begun to look at one 2-sided market: advertising. We cover this at length in our report Telcos’ Role in the Advertising Value Chain. Many, however, have concluded that on its own it is not big enough to provide substantial revenue growth (or indeed to fill the gap left by declining subscription revenues).

This report is designed to help readers understand the nature and size of this new business model opportunity in its entirety. It looks beyond the advertising opportunity to other areas where operators could provide value and generate revenue. It lays out the key principles and strategies for success for fixed and mobile operators and recommends specific actions for moving forward.

A New Generation of Telecoms Platform Services

Fig 2 A New Generation of Telecoms Platform Services
Our belief is that the total two-sided market opportunity is of huge strategic importance for operators. Advertising is only one step for operators to add value to upstream customers (government, advertisers, merchants, application developers, content owners etc.) and end users (businesses and consumers):

  1. Identity, Authentication & Security: Management of user access to products and services.
  2. Advertising, Marketing Services & Business Intelligence: Provide merchants and advertisers with customer profiling information and contextual/behavioural data to enable targeted advertising. Ad-serving capabilities. Performance metrics.
  3. E-Commerce Sales: Managing of sales transaction.
  4. Order Fulfilment – Off-line: Processing of order and logistic/delivery support.
  5. Order Fulfilment – On-line: Electronic content delivery – games, music, TV, video, etc.
  6. Billing & Payments: Billing for products and services and cash collection.
  7. Customer Care: Remove friction & improve customer services by enabling other services to be better integrated with communication.

The report describes the common set of underlying enablers required to enable upstream players to interact effectively with downstream end-users, and shows how operators have the necessary assets and competencies to build such a platform.

It also explores the key lessons from other successful platform players (Akamai, Google, Amazon, Ebay, Monster, iTunes, The London Stock Exchange, Betfair, Maersk) and identifies a way forward for operators:

Key Questions Answered

This report uniquely answers 5 key questions:

  1. How big is the two-sided business model opportunity for operators?
  2. Which are the priority markets/industries where they should look to compete?
  3. Is each market discrete, requiring a separate strategic approach, or is there an opportunity to develop a coherent cross-market two-sided market play?
  4. How should operators go about realising the opportunity?
  5. How does the two-sided model fit with existing retail/wholesale market and organisation structures?

In addition, the report seeks to help operators and vendors maximise future opportunities from operator services by answering the following questions:

  • What is driving pressure on operators’ current business model?
  • How quickly will this become a significant problem?
  • Why are current strategies inadequate?
  • How big is the future opportunity?
  • How much investment should operators make in the two-sided opportunity?
  • Which market should operators develop first?
  • What should be the strategy for further successes?
  • What assets are required for success?
  • Which do operators currently possess and how should others be gained – organic development vs. acquisition vs. partnership?
  • Who should operators partner with?
  • What can be learned from the successes and failures of other platform players?
  • What is the real threat or opportunity offered by Google and Microsoft?
  • How should operators move forward?
  • What role needs to be played by individual operators, partners and industry bodies?
  • What are the regulatory implications and issues presented by this new strategy?


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

Detailed Case Studies: Akamai, Amazon, AP Moller-Maersk, Betfair, Blyk, BT, Google, Monster, Vodafone.

Other Companies and Services Covered:, Amazon, Amazon Kindle, Apple, Apple TV, Babelgum, Bank of America, BBC, BBC iPlayer, Bebo, Betavine, Betfair, Blyk, BT 21CN, BT Click & Buy, BT Counterpane, BT Fresca, BT Tradespace, BT Vision, Channel 4, China Mobile, Cyworld, Ebay, Equifax, Expedia, Experian, Fed Ex, Flickr, France Telecom, Genie, Google, GSMA, iTunes, ITV, Jajah, Joost, Kelkoo,, London Stock Exchange, Mac OS, Maersk Logistics, Microsoft, MMA, Monster, MSN, Napster, Nextag, Nike, Nokia, O2, Opodo, Orange, Payforit, Paypal, Phorm, Pioneer Massive, Playstation, Price Runner, Prime Location, Real Networks, Rolls-Royce, Screen Tonic, Second Life, SK Telecom, Sky, Skype, Teddy Bear Search Engine, Telefonica, Tesco, The Cloud, The Ladders, Tivo, T-Mobile, Truphone, UPS, Verisign, Virgin USA, Visa, Vista, Vizzavi, Vodafone, Vodafone, Windows Software Developers Kit, Yahoo!, YouTube.

Technologies & Applications Covered: ATM, Bluetooth, BSS-OSS, Carrier Voice, DIAMETER, DRM, Enhanced Carrier Voice, IM, IPTV, Java MIDP, Linux, Mobile, Mobile Payments, NGN, Open ID, Parlay-X, PSTN, RADIUS, SIM, SIP, SMS, Softsim, SS-7, SXIP, USIM, Voice, VOIP, WAP Gateway, Windows Cardspace, XMPP.

Forecasts Included

  • Fixed & Mobile Platform Services, VAS, Distribution, New TelcoWholesale – to 2017.
  • 7 key capabilities by industry verticals. (1.Identity, Authentication & Security. 2. Advertising, Marketing Services & Business Intelligence. 3.E-Commerce Sales. 4. Order Fulfilment – Off-line. 5. Order Fulfilment – On-line. 6.Billing & Payments. 7. Customer Care)
  • VAS Platform Europe & US: Top 10 Verticals x 7 Capabilities.
  • 7 key capabilities x Industry sectors, Europe & US.
  • Top 4 Industry Verticals in depth by capability.


Summary of Contents

1. Executive Summary

2. Introduction

  • Current Telecom Operator Challenges
  • Current Operator Strategies
  • Introducing 2-sided Markets
  • Role of this Report

3. The Telco Platform Service Capabilities – Scope to Grow & Grow

  • Defining the Platform Service Capabilities
  • Required Telco Skills and Assets
  • Key Issue – Customer Data Protection & Privacy

4. Sizing the Platform Opportunity – United we Stand; Divided we Fall

  • Sizing the 7 Service Capabilities:
  • Identity, Authentication & Security
  • Advertising, Marketing Services & Business Intelligence
  • E-Commerce Sales
  • Order Fulfilment – Off-line
  • Order Fulfilment – On-line (E-Content Delivery)
  • Billing & Payments
  • Customer Care
  • Sizing the Top 4 Verticals
  • Telco VAS Platform: Examples
  • Conclusions & Implications

5. Case Studies – Telecoms is lagging other Industries

  • Case Studies from Telco
  • Case Studies from Other Industries

6. Moving Forward

7. Appendix

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 hereTo order or find out more please email, call +44 (0) 207 247 5003.

Telcos’ Role in the Advertising Value Chain

Summary: A report identifying how to build a valuable new business model and customer base.

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Fixed and mobile voice and data revenues are in free-fall in most European and North American markets. Since the 3G auctions at the turn of the century, content has long been considered the key future growth area for operators in the consumer segment. However excluding SMS, the only material content revenues for Telcos to date have been through movement into adjacent markets – particularly acquisitions in the cable and media sectors.

Through advertising, operators have a potential opportunity to:

  • Reduce the price of content and services to end-users;
  • Increase the volume of available content and services, and
  • Provide value to the advertising community


To achieve this they must contribute to the development of a differentiated new advertising channel in which users are provided with a portfolio of content and services supported by contextually-relevant advertising.

Operators have an opportunity both to provide their own advertising-funded services as well as become an enabler to the advertising community by helping advertisers interact more effectively with their targets (who may or may not be Telco customers). In this report, we examine both of these opportunities in both the fixed and mobile markets. We explore in detail what advertisers and users really want and the opportunities available to operators to carve out a valuable role in meeting those needs.

Key Questions Answered

This report seeks to help operators and vendors maximise future advertising-funded service opportunities by answering the following questions:

  • What is the rationale for advertising-funded services?
  • When will the market take off and how big will it get?
  • How can operators prevent cannabalising existing revenue streams?
  • What are the needs of the advertising community?
  • How should operators work with Internet enablers (e.g. Google), content providers (e.g. Sony) and aggregators (e.g. Motricity)?
  • What implementation issues need to be resolved?
  • What are the options available to operators to add value and what is the best option available?
  • What are they key factors for success?
  • What value is there in opening-up Telco assets (open APIs etc.)?
  • Which can be learned from market-leaders in advertising-funded services?
  • What are the attitudes of operators, internet enablers, content providers and aggregators to the market and how to be successful in it?
  • What needs to be done to develop the market and generate near-term benefits?


  • Executive Summary
  • Background and Key Issues to Date
  • Growing Pressure on the Existing Operator Business Model
  • Content Delivery: Not a Panacea
  • Advertising-Funded Services: Tried and Tested in Adjacent Markets
  • Telcos’ Role in Advertising: Market Scope
  • Activity from Operators to Date
  • Advertising-Funded Services – Threat or Opportunity?
  • The risk of cannibalising existing revenues
  • Internet players – partner or competitor?
  • Show me the Money! – How big could the market be?
  • Understanding the Advertising-Funded Value Chain
  • Value Chain players in Internet Advertising
  • What do Advertisers *really* want?
  • Options for the Operator to add Value
  • Key Skills and Assets Required
  • Issues to resolve
  • Operator role: The Devil in the Detail
  • Who to Partner with and How
  • Meeting Advertiser and Customer Needs:
  • Return on Investment
  • Customer attention & interaction
  • Performance measurement
  • Ubiquity
  • Legal and Regulatory Issues
  • Learning from Web 2.0
  • Content and Communications: Two sides of the same coin
  • Social Networking Communities and Advertising
  • Case studies:
  • Learning from the Master: Google and the Art of Ad-Funding
  • Accelerating the need for Advertising Revenues: The X-Series from 3
  • The Whole Hog: Blyk’s Advertising-Funded MVNO
  • Delivering an Open Platform: Amazon
  • Views from the Industry – new primary research by STL Partners
  • Action steps & Conclusions

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, call +44 (0) 207 247 5003.

Full Article: Beyond bundling, the future of broadband

This is an edited version of the keynote presentation of Martin Geddes, Chief Analyst at STL Partners, at the October 2007 Telco 2.0 Executive Brainstorm in London. It provides some initial findings from our research into future business models for broadband service providers (BSPs), including our online survey. (The summary results will be mailed out to respondents in the next few days.) Those wishing to find out more may want to take a look at our forthcoming report, Broadband Business Models 2.0.

To save you the suspense, here’s the headlines for what’s upcoming for the telecoms industry, based on what insiders are saying through our survey and research:

  1. Operators are going to face a slew of non-traditional voice service competition. To corrupt the words of Yogi Berra, “The phone network? Nobody goes there anymore, it’s too crowded.? The volume may linger on, but the margins in personal communication will move elsewhere.
  2. Content delivery is a logistics problem that spans many distribution systems. Those who can solve the delivery problem by sewing together many delivery services, rather than those focused on owning and controlling one channel, will win.
  3. Wholesale markets in telecoms are immature and need to evolve to support new business models.
  4. Investors aren’t up for more “loser takes nothing? facilities-based competition capex splurges. Time to look hard at network sharing models.

So, read on for the background and evidence:

Background to the survey and research

Our ingoing hypothesis is that telecoms – fixed or mobile — is a freight business for valuable bits. This could be via traditional voice networks. Broadband is another means of delivering those bits. It includes Internet ISP access, as well as other services such as private VPNs and IPTV.

Broadband competes with and complements other delivery systems like broadcast TV, circuit-switched phone calls and physical media.

Just as with physical goods, there are lots of delivery systems for information goods. These are based on the bulk, value and urgency of the product – from bicycle couriers to container lorries for atoms; phone calls to broadcast TV for bits.

As part of our research we’ve also been looking at how other communications and delivery systems have evolved commercially, and what the lessons are for the telecoms industry. After all, broadband as a mass-market business is barely a decade old, so we can expect considerable future change. In particular, the container industry has some strong parallels that may hold important lessons.

Physical goods and the telephone system have developed a wide range of payment methods and business models.

With physical goods we have “collect it yourself?, cash-on-delivery, pre-paid envelopes and packages, as well as express parcels, first and second class postage.

The phone system offers freephone, national, non-geographic and various premium-rate billing features. It offers the user a simple, packaged service that includes connectivity, value-added features, interoperability, support and a wide choice of devices.

Likewise, SMS packages together the service and its transport. It’s wildly popular, bringing in more money globally than games software, music and movies combined.

The problem is that this has come within closed systems that don’t enjoy the rich innovation that the open Internet brings.

Internet access, by contrast, offers an abundance of goods but is relatively immature in the commercial models on offer. Broadband service providers typically offer just one product: Internet access. And they generally only offers one payment mechanism for delivery of those online applications: one-size-fits-all metered or unlimited, paid independently of services used. (There are some important exceptions — you can read more here.)

As a small example of how the Internet under-serves its users, when a small non-commercial website suddenly gets a surge of traffic it typically falls over and is swamped. That is because there’s no commercial incentive for everyone to pay for a massively scalable hosting plan just in case of unexpected demand. The telephony system doesn’t suffer this because the termination fee for every call is designed to at least cover the technical cost of carrying the call.

Oh, and don’t expect Google to host it all for free for you either – the error message in the slide above is cut and pasted from a bandwidth-exceeded Google Blogger account.

There is also a lack of incentive for access providers to invest in capacity on behalf of Google to deliver richer, heavier content (where Google collects the revenues).

The question therefore is: How can BSPs find new business models inspired by more mature distribution systems?… whilst at the same time not killing off the innovation commons that is the Internet. BSPs must both create and capture new value in the delivery of online applications and content. Being an NGN or IPTV gatekeeper is not enough.

Fixed voice revenues are declining; mobile voice is peaking; and SMS is slowing down. The theory has always been that broadband ISP services will take up the slack, but in practise margins are thin.

Our research is testing out a wide variety of alternative commercial models. For example, would an advertiser like Google pay for not just the hosting of content (via YouTube, Picassa or Blogger), but also the end-user usage on a fixed or mobile device for receiving that content?

We believe that whilst these alternative models may individually be much smaller than traditional broadband Internet access, collectively they may add up to a larger amount of value.

Survey supporters and respondents

The research would not be possible without the active support of the above sponsoring and supporting organisations, and we thank them all.

We’ve had over 800 respondents, with roughly one third from operators & ISPs; a quarter from vendors; and the rest consultants, analysts, etc. The geographic split is Europe 40%, N America 30%, Emerging 20%, Developed Asia 10%. There is a ratio of around 60:40 fixed:mobile respondents, and mostly people from commercial (rather than technical) functions.

We asked about four main areas:

  • Today’s ISP model — is it sustainable.
  • Future of voice service in a broadband world
  • Future of video service, as the other leg of the “triple play? stool
  • Future business and distribution models

Rather than assault you with dozens of charts and statistical analyses, what follows is the gist of what we’ve discovered.

Furthermore, we’re looking 5-10 years out at macro trends. You might not be able to predict Google, Skype or Facebook; but you can foretell the rise of search, VoIP and socially-enhanced online services. Even in our own industry, there can be large structural changes, such as the creation of Openreach by BT. You could probably have foretold that as vertical integration weakens there would be such organisational upheavals, even if not who and when.

Sustainability of ISP business model

What’s the future business model for broadband?

Around 20% see the current stand-alone ISP business model as sustainable long-term. This includes many senior industry figures, who cite better segmentation, tiered price plans, cost-cutting and reduced competition in more consolidated markets. It may be a minority view, but cannot be dismissed out of hand.

Around a quarter of respondents thought that broadband works as part of a triple or quad-play bundle of voice, video and data – cross-subsidised by its higher-margin cousins. This is the current received wisdom.

However, a majority of respondents say that a new business model is required. These results hold broadly true across fixed and mobile; geographies and sectors.

Which brings us to our first lesson from the container industry. Old product and pricing structures die hard. The equivalent efforts at maintaining a “voice premium��? all failed. Trying to price traffic according to the value of what’s inside the container or packet doesn’t scale.

For BSPs, that means technologies like deep packet inspection might be used:

  • for law enforcement (“x-ray the containers?), or
  • to improve user experience (at the user’s request), for example by prioritising latency-sensitive traffic (“perishable goods?)

However, traffic shaping can’t be your only or main tool for the long-term; you can’t reverse-engineer a new business model onto the old structures. It doesn’t, ultimately, contain your costs or generate significant new revenues.

Broadband voice

One of the big surprises of the survey was how quickly respondents see alternative voice networks getting traction. We asked what proportion of voice minutes (volume – not value) will go over four different kinds of telephony in 5 and 10 years from now. Looking at just the growth areas of IP (i.e. non-circuit) voice, you get the following result.

It seems those WiFi phones we laugh at now are more dangerous than previously thought – maybe when 90% of your young customers are communicating via social networking sites, you’ve got some unexpected competition? (Indeed, we note that social network traffic is just overtaking the traditional email portals.)

We were also given a surprise in that respondents saw most of these changes happening over the next 5 years.

Insiders see the growth in voice traffic as being anchored on best-effort Internet delivery, which gets around 1/3 of the IP voice traffic. Using traffic shaping, offering tiered levels of priority, and using traditional end-to-end quality of service guarantees all got roughly equal share.

There are some small differences between fixed and mobile, and mobile operators might like to seriously consider offering tiered “fast dumb pipe? and “slow dumb pipe? that applications can intelligently choose between.

This all suggests that operators may be over-investing in complex NGN voice networks and services. They need to urgently work out how they can partner with Internet application providers to offer “voice ready? IP connectivity without the costly telco-specific baggage of telco protocols and platforms.

So what’s the lesson from container shipping for the broadband voice community?

At the same time as containers where being adopted, some ports doubled-down on the old business model and built better breakbulk facilities – and lost. Manhattan’s quays are gone, Newark has replaced it.

Others waited to become “fast followers?, and lost too. London went from being one of the world’s busiest ports, to zero activity. Dubai did the reverse by investing exclusively in the new model, with a low cost base and high volume. (Shades of Iliad’s approach in France.)

The winners were those who staked out the key nodes of the new value chain.

There are some clear lessons here for telcos and their NGN voice networks. The cost of broadband access technology is dropping, capacity is rising, and the voice component’s value is decaying towards zero. Furthermore, session control (the software part of the voice application) is just another IT function that runs inside a big server, and isn’t something you can charge for above hosting costs. It has the economics of email, and that’s mostly given away for free. So IP voice isn’t adding anything to your triple/quad play bundle, and can only be justified on the basis of reducing cost in the old business model. An IP NGN voice service that’s still selling metered minutes does not constitute a new business model.

Broadband video

The survey results for video are a little less dramatic than for voice and follows received wisdom more closely. Overall respondents endorsed Internet video as far more of an opportunity than a threat. (Only in telecoms can a significant proportion see more demand for their product as a problem! The potential issue is that video could drive up costs without sufficient compensating revenue.) A long slow decline for broadcast TV and DVDs is matched to a slow ramp-up in various forms of on-line delivery. Every form of Internet delivery, from multicast IP to peer-to-peer file sharing gets a roughly equal cut. There were some things to watch out for though…

The opportunity is to become as supplier of advertising, e-commerce, caching and delivery services for a variety of video portals, not just tied to your own. This isn’t surprising; can you imagine a Web where there were only two portals to choose from, both owned by the network owners? The same applies to video.

Economic migration, cultural fragmentation and user-created content ensure that we’ll need a diversity of aggregation, recommendation, filtering and presentation technologies.

Given a choice between building a closed IPTV solution, or an open content platform, the response was well in favour of the latter as the more profitable to run. (The slow ramp up of BT’s Vision service suggests its success is more likely to be based on the “push? of analogue switch-off than the “pull? of the telco brand as a TV provider. Why do no telco TV plans centre around external entrepreneurial talent and innovation?)

Both options beat the alternative of disinvestment in video delivery technology. So fixed and mobile operators are well positioned to help enable and market video, just not “TV over IP?. That’s the steam-hauled canal boat, when you’re supposed to be using IP to build a railroad. It seems telcos are over-investing in emulating broadcast TV and under-investing in the unique nature of the online medium.

P2P and “over the top? are here to stay. You deal with the costs by offering more profitable alternatives, not by punishing your most voracious customers. (See our article on Playlouder as an example of how to do it right.)

In music, Apple’s iTunes captured the key bottleneck in the distribution chain. Could the same happen for online video?

We gave respondents a choice of four scenarios:

  • Direct to user from the content author or publisher
  • A single dominant player
  • A fragmented market dominated by telecoms companies
  • A fragmented market dominated by non-telcos

Our respondents say that the market is likely to be fragmented with many aggregators and non-carriers will dominate. Again, “triple play? doesn’t capture the richness of the business-to-business model required with many partners in the distribution and retail value chain. How will Telco TV satisfy my wife’s taste in Lithuanian current affairs and my interest in gadgets and economics lectures? It can’t.

Our take-away from the shipping industry is that when it comes to shifting bulky stuff around, big is good and bigger is, err, gooder. Networked infrastructure businesses have strong increasing returns to scale. There’s no point in building a new port anywhere near Rotterdam because that’s not where the other ships go. There’s a good reason why Akamai takes the bulk of the profit pool from content delivery networks — their one is the biggest.

Network ownership models

Compared to today’s dominant models (facilities-based competition and structural separation), respondents rated a third ownership model – co-operatives of telcos – surprisingly highly. The two currently dominant models remain on top.

The issue is how to structure the vehicles for mutual or co-operative asset ownership. The financial industry has already created structures that allow shared operational businesses, either mutually owned or as private special entities. Furthermore, they’ve managed to preserve barriers to entry. To become a member of the VISA network, you need a banking license. That costs a lot of money.

Telecoms and the Internet business have some common structures around numbering and interconnect, but could emulate these other models from other industries.

The arrival of containers shifted the balance of profit away from the shipping lines and towards the ports.

In terms of telecoms, it’s where the content is originated or goes between delivery systems that matters – from CDN to broadband access, from broadcast to DVR. That means every Googleplex and content delivery network that gets built puts Google or Akamai at a massive advantage, since everyone wants to peer with them.

Traditionally it has been long distance and access networks that have dominated telecoms economics. AT&T’s early years found it the only owner of a long-distance network and thus able to negotiate very advantageous terms in buying up local carriers into the Bell system. It mistakenly help onto the long distance network just as the bottleneck shifted to the access network. At the moment the US sees a duopoly in access networks, and supernormal profits. Wireless carriers enjoy an oligopoly in most markets as a by-product of spectrum licensing.

However, Europe is moving towards structural separation or open access of fixed networks. Homes and offices offer WiFi or femtocell bypass options for cellular. Over time, local access ceases to be such a bottleneck. Furthermore, there are many physical paths and proliferating technologies and suppliers hauling data between the distant points that want to be connected up — be it transoceanic cables or competing wireless backhaul technologies. So the owners of the transmission networks don’t enjoy the benefits. It’s the owners of the places where traffic is exchanged between delivery systems that do, since those feature increasing returns to scale and dominant suppliers.

What is the product we are selling?

Today operators expect you to go out and buy yet another access plan for every device you touch or place you make your temporary home. They sell “lines��?, either physical, or virtual (via a SIM card). Is this really the right way for the future?

All I want to do is connect my phone and laptop to the Internet wherever I am – but I get different prices and plans depending on which combination of device and access technologies I use – yet all from a single vendor. (The first is using my phone as a 3G modem over a USB cable; second is a separate 3G USB modem; third is WiFi.) This creates the perverse incentive when I’m sat in Starbucks to use my phone as a modem for my laptop over the expensive 3G network.

Also, I might be a peer-to-peer download lover, and hopelessly unprofitable. Or I might just want to check my email and surf the web a little on my mobile. How can you rationally price this product? What are the alternatives?

We gave users a choice of 3 alternatives (above) as to how broadband connectivity is provisioned. Should we sell you “unlimited browsing?, but listening to Internet radio is a separate charge? Or should we price access according to the device, but not make the plan portable between devices? A data plan on a basic featurephone would differ in price from a smartphone, Internet tablet or laptop. Or should we just give the user a set of credentials that activates any device or network they touch and bills that usage back to them?

The preferred one was to offer users a connected lifestyle, regardless of devices, applications or prices.

BT’s deal with FON is an example of a step towards this goal. Picocells too have the potential to upend the access line model. In terms of immediate actions, mobile operators should recognise the trend towards divergence and users with multiple handsets. Don’t make me swap SIMs around when I go from my “day phone? to “out on the town phone?. Give them a common number and interface.

New, more liquid, ways of combining together devices and networks for sale would require wholesale markets to evolve.

We asked what impact it would have on BSP revenues if all the friction were taken out of the wholesale market. Anyone who wants to come along and build an application with connectivity included in the price would be able to source their wholesale data from any carrier. You don’t have to be Yahoo!, Google or RIM to negotiate a deal with every carrier in the world, or make one-off special billing integration.

The effect? A 50%+ boost in revenues, which has a commensurately greater effect on profit. How much value is the broadband industry leaving on the table because of its inability to package up and sell its product via multiple channels?

Even more profitable than the ports are the agents who arrange the end-to-end logistics and supply chains for their customers. In telecoms terms, it’s the operator who can assemble a multitude of fixed and mobile networks, content delivery systems and B2B parterships with the application providers that wins.

For telcos, the critical development to enable personalised packaging of connectivity, applications and devices is to build richer wholesale models. The hot activity will be in the B2B markets, not direct-to-user. The failure of most MVNOs has shown that you don’t just want to create “mini me? telcos, but to enable more granular offerings.

Conclusions and summary

Telecoms is going to move to a multi-sided business model. Google are as likely to be paying for the full delivery of the ad-supported YouTube video as the user is. The telco will also feed Google usage and relationship data to help target advertising. Google might use credit data from the operator to manage its own fraud and chargeback risk on its checkout product. Telcos are logistics companies for data, helping the right data to be at the right place at the right time. This is completely different from being a “dumb pipe��?, wannabe media company or end-user services provider.

When you buy a new electronic gizmo, it typically comes with batteries included. The battery makers have learnt to supply batteries wholesale to consumer electronics makers, as well as to end users. Broadband needs to evolve to add “connectivity included?, with the right quality and quantity packaged up with the application or content in ways that the user finds easy to buy. Today’s product is selling users a raw unprocessed commodity, which is serving neither the interests of the users, merchants or operators.