Brexit: Telecoms Strategy Implications – #1 Prioritise Transformation

Published here is our outline of what has happened in the UK, what still has to happen, and the near-term consequences.

The full report further outlines scenarios for how the saga may play out, and explores opportunities and threats for operators and technology partners in the UK, the EU and beyond.

Introduction: What actually happened in the UK?

Why was a vote called?

British Prime Minister David Cameron first considered a referendum on European Union membership in 2012, with the idea that it might be a way to generate support from Eurosceptic members of his own Conservative Party. In January 2013, Cameron made a two-fold promise that, should his party win a majority at the 2015 general election, the Government would attempt to negotiate more favourable arrangements for Britain’s EU membership, and subsequently hold a referendum to decide whether the UK should leave or remain part of the EU.

In May 2015, the Conservative Party won the general election, and David Cameron reaffirmed his pledge. By February this year, Cameron had announced the outcome of a renegotiation of the UK’s EU membership, and confirmed that a referendum would take place on 23 June. The question chosen to appear on the ballot paper was: “Should the United Kingdom remain a member of the European Union or leave the European Union?”

The result

Figure 2: The EU referendum – how Britain voted

Source: Lord Ashcroft Polls, BBC

46.5 million voters were eligible to vote in the referendum, of which 33.6 million voted. At 72%, this represents a high turnout.

Of those voting, 17.41 million (52%) voted to ‘Leave’ and 16.14m (48%) voted to ‘Remain’ in the European Union, a majority of 1.27m in favour of leaving. Immediately after the result, Prime Minister David Cameron announced his resignation, to be effective once a new Conservative party leader was chosen.

Polling reports by voting constituency show a relatively consistent pattern of a ‘Leave’ majority in most of England and Wales, with a ‘Remain’ majority in London, Scotland, major university cities, and Northern Ireland. Surveys suggest that the ‘Remain’ voters were on average younger and better educated.

Why did the UK ‘Leave’ campaign win?

The reasons behind the victory of the ‘Leave’ campaign are complex and probably not yet fully understood – the result was as much of a shock in the UK as the rest of the world.

Nonetheless, to help set the outcome in context, we shall carefully try to piece together some insight into the ­­main drivers combining our understanding of the events, supported by findings from one published post-vote survey, hopefully without touching still sensitive nerves in the UK and elsewhere.

The primary reason given by ‘Leave’ voters was “the principle that decisions about the UK should be made in the UK”. More qualitatively, there are concerns too about the future intent of the EU to integrate even more deeply, and even many ‘Remain’ voters dislike the perceived distance and inefficiency of the EU itself.

Migration was also cited as the second most important reason to vote ‘Leave’, and there has recently been a significant increase in EU migrants coming to work in the UK. While some areas have felt the impact of the inflow of migrants more than others, net EU immigration amounted to 0.3% of the population last year. The voters’ concern was of ‘uncontrolled’ future migration.

The ‘Leave’ campaign tapped into and amplified into both democratic and migration concerns deftly with the clear and emotional central promise to ‘take back control’, and spoke in everyday language. Boris Johnson, the former Mayor of London joined the campaign in February, and gave it a better known and well liked face.

In contrast, the ‘Remain’ campaign lacked clarity and cohesion among its leaders and messages, particularly around controlling immigration. It was also neutralised on the issue of the likely economic damage of Brexit by the accusation of running ‘Project Fear’ – claims of impending disaster to scare voters onto its side.

The Labour half of the ‘Remain’ campaign was accused of lacking conviction.  The Labour party leader, Jeremy Corbyn is now facing his own “Jexit”, as 172 Labour Members of Parliament (c.75%) delivered a non-binding “no confidence” vote on his leadership.   It has even been suggested that Mr Corbyn voted for Leave. (Ironically, a similar rumour suggests Boris Johnson voted ‘Remain’.)

While the overall tone of the campaign became rather toxic and facts became a casualty to both sides, the ‘Leave’ campaign cut through with its clearer message, emotional appeal, and better-worked rhetoric.

Many surveyed said they had come to the decision to support ‘Leave’ before all the campaigning of the last few weeks, based on the view that the benefits of taking back control of decisions and migration would be worth the (hotly disputed) risks of whatever economic consequences there may be. The argument is that in the medium term, the UK will be able to negotiate better trade deals outside Europe, no longer held back by the less agile EU, with its 27 different national interests to complicate every deal.

There is also a sizeable body of disaffected and disenfranchised voters in the UK, more typically (but not exclusively) less affluent and living in rural areas and small towns, who feel they have been talked down to and left behind by the metropolitan, educated elite, including politicians, business leaders, economists and other experts. The EU vote was an opportunity to protest, and the warnings of economic ruin by ‘the elite’ simply strengthened their resolve to give ‘the establishment’ – and ‘the elite’ – a metaphorical ‘kick’.

What are the consequences – in the UK and beyond?

UK politics will be in a muddle for a while, and it is far from clear what will happen

You might think that the vote has been cast, and that would be that: the UK is out of the EU. This is far from the case. There is considerable opposition to leaving, and many procedural opportunities for further twists and turns which we outline in this section. Our aim is to help explain why there may be a long delay before anything much more tangible happens, and some of the factors that might drive the emergence of different scenarios.

Before anything much more can be resolved, Britain needs a prime minister. Constitutionally, David Cameron remains in office until his successor takes over, but there are obvious limits to his authority as a ‘lame duck’. The logic of the constitution is such that the Conservative Party first needs to choose a new leader, who would automatically become prime minister by virtue of the Conservative majority in the House of Commons.

For exit to actually happen, the UK government must send the European Council a notification under Article 50 of the Lisbon Treaty. Once the notification is received, a clock is set running on the withdrawal process – the parties then have 2 years to negotiate terms. If there is no agreement within that time, the European treaties cease to apply to the withdrawing state in a so-called “hard exit”.

Cameron has stated that he will not give this notification, leaving this for his successor on the grounds that having resigned, he no longer has the legitimacy to take such a historic step. This means that the situation is currently on hold. Some lawyers argue that the Article 50 notification would need a vote in the House of Commons, which has a substantial majority in favour of remaining in the European Union, in a further complication. It may also be covered by the principle that the Westminster parliament only acts on Scottish affairs with the Scottish government’s consent, which is very unlikely to be given. This interpretation, however, is controversial.

Meanwhile, the opposition Labour Party is in a similar state of crisis, as its MPs try to remove the party leader. Because that party’s rules require a full party conference to sack the leader, and then an election by the members, it is possible that they might not be able to remove him before the conference in September, unless he chooses to resign. Even then, he might stand for election as his own successor.

As a result, it is unlikely that much can be decided until the parties have resolved their own internal crises. Once this has happened, though, the UK will have an unelected prime minister and a parliament largely elected on a platform of staying in the EU. Therefore, it may be necessary to call a general election (since 2011, this needs a 2/3 majority of Parliament, so could be problematic in itself).

A prime minister unwilling to leave the EU might use this as a way to back down from the referendum, on the basis that the electorate had spoken once again and had evidently changed its mind. Alternatively, he or she could use it to seek a mandate to implement their chosen version of Brexit. In the event that the Article 50 notification is issued, it is almost certain that the Scottish Nationalist Party would seek a second referendum on independence from the UK.

The UK in general: a state of shock

It is hard to gauge the knock-on impact of the vote on the wider population, other than to say that the STL Partners team has never experienced such an emotive and divisive political issue. There are disagreements within families, between friends, within communities, and across the nation.

There have been increases in reported racist crimes and confrontations, and the vote and its political fall-out dominates the news coverage.

There is not rioting on the streets, but there is a sense of shock, anger and disbelief among many on all sides. Perhaps the ongoing drama of the political fall-out in Westminster and Brussels, and a general weariness with the whole situation, are diverting the tensions.

We hope that things will calm down quickly, but there may well be months of more stress ahead. In the long term, the divisions between the predominantly ‘Remain’ areas like London and Scotland, and strongly ‘Leave’ rural areas and towns need to be addressed, but the solutions are not obvious. This vote has merely highlighted and amplified the differences, and Brexit itself does not offer a solution.

Economic Uncertainty: threat and opportunity

The primary macro-economic impact so far has been a deep devaluation in sterling. This will move the balance of payments on current account, heavily in deficit (i.e. imports exceed exports) at the moment, towards balance, as UK exports get cheaper and imports dearer. The consequences of moving towards balance will depend on how this happens.

One possibility is that British exports might be quite price-elastic. In this case, export volumes would rise more than import prices, and the devaluation would therefore increase aggregate demand and GDP. However, if they are less price-elastic, the increase in export volumes might not be enough to outweigh the rise in import prices, and the impact would be negative.

It is historically quite common that economies going through a major devaluation experience both, in the so-called J-curve effect. In the short term, import prices rise immediately, but it takes time to increase export volumes, and there is a recession. In the medium term, exporters adjust to the new exchange rate and there is a recovery. Service exporters – a very important category – cannot simply sell more units (nobody consumes more corporate lawyering because it is cheap), but have to gain new customers or sell more complicated services to existing ones.

If exit itself is disruptive to trade with the EU because of ill-feeling on either side (as might seem likely) or regulatory/non-tariff barrier issues, this would also make for such a scenario. Another, much more negative possibility, would be a recession in the domestic economy that reduces demand for imports and drives the current account into balance that way.

A third, even worse possibility would be a financial markets-driven “sudden stop”, in which the inflow of financing into the UK (the capital account surplus) would slow down dramatically. The current account would move into balance because importers became credit-rationed, resulting in a deep and rapid recession. Much depends on what the actual UK-Europe trade relationship turns out to be, and on the price elasticity of demand for UK exports.

What is very likely is that at least 2 years of intense uncertainty are in prospect, and during this time we expect many UK (and some EU) investment decisions to go on hold. It may be more likely that the UK experiences a classical recession, led by investment decisions in cyclical sectors like construction, and that this leads to a smaller current account deficit, rather than a change in the current account leading to a recession. Heavy selling on the stock market has focused on cyclical and consumer stocks like banks, airlines, housebuilders, and supermarkets. This implies the market is pricing in such a scenario.

In the telecoms sector, the UK would feel the effect on sales of flagship smartphones in mobile and big TV bundles in fixed – i.e. big ticket discretionary spending, the sort of thing that is likely to go first. Virgin Media’s £3bn Project Lightning fibre roll-out is an investment that might be affected, as owners Liberty Global have other markets they could deploy the CAPEX in.

As for investment into the UK, the devaluation renders UK assets significantly cheaper, and permits buyers who finance themselves in the UK to lever up more – a given amount of foreign-denominated equity is now worth more in sterling, so a larger loan can be floated at the same leverage ratio. The fundamental decision is therefore whether this advantage is worth the macro risk. The possibility of a nasty shock – such as the failure of a systemically important financial firm – can’t be ruled out.

For telcos in particular, a crucial issue is that their infrastructure is almost exclusively sourced from markets that trade in dollars or euros, so capital spending will be under significant pressure. Infrastructure sourced from China is paid for in dollars. Ericsson reports significant exchange rate adjustments in its accounts, suggesting that it gets paid in dollars and converts to Swedish kroner, while Nokia (plus ex-Alcatel) is of course in the eurozone. As a result, capital investments in the UK are financed in foreign currency and repaid out of sterling cashflows, so they will be significantly more expensive in future.

Longer-term impact will be overwhelmingly determined by the future shape of UK-European trade. This ranges from neutral – in the case where the UK stays, or shifts to a “Norwegian” relationship under the EEA Treaty – to seriously negative – in the “no deal” case where the UK ends up operating under WTO most-favoured nation tariffs. These are as high as 16% in the automotive sector, one of the biggest UK export lines of business (this Wall Street Journal app is invaluable here). We explore these scenarios in greater detail in the Scenarios section below.

Any upside for the UK is dependent on a substantial re-orientation of trade to extra-European markets; two of the biggest, China and Brazil, have their own problems in the short term.

 

  • Executive summary (not published here)
  • Introduction: What happened?
  • Why was a vote called?
  • The result
  • Why did the UK ‘Leave’ campaign win?
  • What are the consequences?
  • UK politics will be in a muddle for a while
  • The UK in general: a state of shock
  • Economic Uncertainty: threat and opportunity
  • Possible scenarios (not published here)
  • Scenario 1 – Hard Exit
  • Scenario 2 – Boris Johnson’s Norway
  • Scenario 3 – No Exit
  • Scenario 4 – Rolling Crisis
  • Consequences for telecoms – in the UK, the EU, and beyond (not published here)
  • Regulation
  • Customers: Finserv
  • Customers: Automotive and Industrial
  • Customers: Media and TV
  • What should TMT leaders do? (not published here)
  • Don’t give up on transformation
  • It could happen to EU
  • The least disruptive possible outcome is a de-escalation
  • The danger of a run on the skills bank
  • Don’t catch a falling knife

 

  • Figure 1: Summary Scenario Impacts for the Telco Industry
  • Figure 2: The EU referendum – how Britain voted
  • Figure 3: BT slides, Equinix soars

European Mobile: The Future’s not Bright, it’s Brutal

Summary findings and implications

Dark skies ahead

The mobile telecoms sector has performed quite strongly through the economic downturn but STL Partners’ forecast for UK, France, Germany, Spain and Italy suggests that the outlook is extremely bleak:

  • Even in the UK and Germany, the markets with the brightest future, STL Partners forecasts a respective 19% and 20% decline in mobile core services (voice, messaging and data) revenues by 2020. The UK has less far to fall simply because the market has already contracted over the last 2-3 years whereas the German market has continued to grow.
  • We forecast a decline of 34% in France over the same period.
  • In Italy and, in particular, Spain we forecast a brutal declines of 47% and 61% respectively.
  • Overall, STL Partners anticipates a reduction of 36% or €30 billion in core mobile service revenues by 2020. This equates to around €50 billion for Europe as a whole.

Figure 1: Mobile core Service revenues

European Mobile Core Services Revenue Forecast Chart, Oct 2012, Telco 2.0

Source: European regulators, Mobile operators, Barclays Capital, STL Partners assumptions and analysis

  • Even if our forecasts prove to be too pessimistic – and we have sought to be realistic rather than unduly negative and have built our models bottom up looking at pricing and volume trends wherever possible – the future looks much worse than other analysts and industry observers are currently forecasting. For example, a recent report by Arthur D Little and Exane BNP Paribas forecasts a 2.3% per annum decline in mobile to 2015 compared with our forecast of 4.3% per annum decline over the same period.
  • Data growth, service bundling, customer experience improvements and cost-cutting activities are valuable but fall way short of offsetting declines in voice and messaging. The game for mobile operators in Europe is changing forever: as things stand, in a few short years they will be forced to become very much more conservative businesses – more like gas and water companies. Interestingly, the capital markets already rate telecoms companies as utilities judging by their lofty dividend yields.
  • There will be casualties. Several operators will not exist in their current form by 2020. Despite the desire of regulators to have four or five network operators in their countries to encourage competition, the downward revenue pressure will favour scale economies and the pressure for many operators to merge or acquire/be acquired will be overwhelming.

Get your umbrellas ready now

We are starting to see a few European operators invest more actively in building new revenue streams – something that STL Partners has been pushing through its Telco 2.0 initiative for several years. Telefonica with Telefonica Digital, KPN, Orange, Telenor and a handful of other companies are becoming more active in ‘digital services’ and new business models. This activity urgently needs to be accelerated and prioritised if operators stand any chance of replacing the impeding revenue declines.

For future success, operators must embrace Telco 2.0 (and recognise the need for a new business model and new service offerings) whether that is as a lean ‘Telco 2.0 Happy Pipe’ or as a ‘Telco 2.0 Services Provider’. Both of these strategies require business model transformation that encompasses:

  • Major strategic choices and decisions about what the organisation should and should not do;
  • The identification, selection and development of new products and services;
  • More effective processes for bringing newly developed services to market;
  • A realignment of organisation structures to deliver the new services;
  • A redefinition of the way operators work with each other and with external partners to build value;
  • Clarification of how technology should support the Telco 2.0 business model and services;
  • A review of revenue and cost models to maximise value for consumers, partners and telcos themselves;
  • A new relationship with regulators as the industry seeks to redefine its role and value in the digital economy.

STL Partners remains committed to working with TMT players that want to make the changes identified above in three ways:

For more details of how STL Partners can help you, please contact us.

Introduction

The telecoms industry is performing quite well in a tough economic environment

At the moment, the global telecoms industry seems to be in relatively robust health – developing economies are driving subscriber growth, 4G is being rolled out, smartphones are being connected with data plans in huge numbers, service providers are selling bundled “integrated offers” to maintain revenues, and costs are being controlled with network-sharing and other strategies

But there is also a nagging concern held by industry managers and observers that all is not well ‘below the waterline’, especially in mature markets. There have been a few worrying signs from operators losing out on messaging revenues to OTT players like WhatsApp, or suffering outright reductions in revenues and subscriber numbers in markets like Spain. That said, these have been largely ascribed to poor pricing decisions or (hopefully) temporary local macroeconomic problems.

Certainly, the financial markets seem pretty convinced in the operators’ underlying ability to turn consumers’ desire for communication into ARPU. Not only that, but there is broad conviction that growing data revenues should be able to offset – plus or minus a little – slow declines in voice and messaging, especially when it is all wrapped up in a bundle.

The question is whether that assumption is really valid, or whether there are broader structural risks, or even any reality in the dystopian view that revenues could suddenly ‘fall off a cliff’? Looking at the fixed telecom industry, it is notable that voice revenues have undergone a fairly precipitous decline over the past decade, partly because of mobile substitution, partly because of competition and, in some cases such as lucrative international calls, because of competition from Skype and its peers. Meanwhile, adjacent markets such as cable have started to suffer from the popularity of alternative sources of digital TV and content. Some of the fixed operators have picked up the slack with IT services and cloud infrastructure, but others have suffered – often to the extent that they have sold out, typically to their mobile peers.

But how bright is the future really?

Will mobile operators fare any better over the next 5-10 years? In developed markets, they have to contend with market saturation, increasing competition on basic services, and tightening regulatory regimes. They also need to deal with the strategic issue of the internet-based app ecosystems such as Apple’s and Google’s, and OTT-type services from the likes of Facebook and Microsoft/Skype. There is also a possibility that the very nature of ‘core services’ like telephony might change, as voice communications starts to get embedded into apps and the web itself. Some observers even see our 100-year relationship with voice telephony diminishing in importance, as other forms of communication become more useful.

This report looks into the mobile marketplace – specifically, voice and messaging services in the main European countries. We have constructed a “what if?” scenario model, that takes some basic assumptions about voice usage and pricing, along with data revenues trends. Rather than just assuming that ARPU will remain broadly flat and then divide it up between voice and data, we’ve started looking from the bottom up. Can likely declines in voice revenues really be made up elsewhere, especially given the possible collapse of SMS and the commoditisation of mobile data? Just how big might the gap be that needs to be filled with ‘other services’ such as content resale, two-sided capability exposure, M2M, vertical industries or Telco-OTT propositions?

Taking together the five largest European mobile markets – Germany, France, UK, Italy and Spain – paints a picture that should cause some alarm. Despite the rise of smartphones and dongles, overall quarterly mobile revenues are down 10% on their peak from Q3 2009; falling from €24.7bn to €22.2bn in Q1 2012. Even accounting for seasonality, this is significant (a €10bn annualised shortfall) – and early results suggest the fall accelerated in Q2 2012, as economic and competitive factors bit deeper into sales, with recessions in several countries and new entrants such as Free in France.

Worse, if we just look at voice revenues, the market is now down 25% from its peak in Q2 2009, and that fall seems to be accelerating. While declining voice ARPU is not a huge surprise, the failure of other services to take up the slack is disappointing, especially as the source of new business – basic data connectivity – also is the most capex-hungry in terms of extra costs of new spectrum and 3G/4G build-out.

Figure 2: EU5 Mobile Services revenue already down 10% from 2009 peak

EU5 Mobile Services Revenues Chart, Telco 2.0, Oct 2012
Source: STL Partners

A set of cold-blooded forecasts for UK, France, Germany, Italy and Spain

To the best of our knowledge, nobody else has made forecasts that are both dispassionate and founded on hard data and bottom-up analysis.

Too many analyst (and we suspect internal) financial models seem to suggest that ‘It’ll be alright, somehow… telecoms operators need to harvest cash from voice and messaging, grow data and find some new revenues, but there’s plenty of options’. STL Partners is questioning the first and second premises in the statement above – about harvesting voice and messaging and growing broadband data – not because we’re pessimists, but because we think that many in the industry are not acknowledging the scale of the problems ahead and making the necessary (and often uncomfortable) decisions early enough.

Views vary widely on the outlook for mobile telecoms in Europe

It is fair to say that the fixed telecoms industry has undergone enough pain over the last decade to be under no illusions about its challenges. Operators realise that they face a continued hard slog against competition, regulation, content providers and indifferent consumers. They have increasingly focused on businesses, wholesale models and specific high-value niches like fibre-based triple-play. Deployment of FTTC/FTTH has been patchy, as they have realised that political support doesn’t equate to revenue uplift or return on capital.

Conversely, the mobile industry has pinned its hopes on LTE, data services and various collaboration and partnership business models. Some operators have essentially become Apple and Samsung resellers, offering credit-finance for expensive devices in the guise of handset subsidies. Plenty of other ideas, from mobile money to M2M to API exposure have been the subject of huge efforts. As yet, none has really moved the needle compared to the legacy telephony and SMS services that still make up a large (60%+) share of most operators’ top line revenues. The only bright spot has been plain-vanilla Internet access, initially with 3G dongle modems for PCs, and more recently for smartphone data plans. But the former has now gone largely ex-growth (thankfully, in some cases, given the traffic loads generated at low prices). And the latter faces growth challenges once most users have shifted to a smart device, as few users seem incentivised to upgrade to larger data plans so far.

Privately held view seems to be pessimistic…

In private discussions with operator executives, we encounter a fair level of pessimism, especially about voice and SMS revenues. At our conferences, we have asked senior executives (using our anonymised voting system) about possible price and value erosion, and are often surprised by how far and fast telcos seem to think these core services will dwindle.

Figure 3: Example Telco 2.0 delegate view of 3-year voice revenue decline

Euro Mobile: The Future's Brutal - delegate views, Telco 2.0, Oct 2012
Source: Delegate Vote, New Digital Economics Executive Brainstorm, November 2011

…yet publicly, there is much less acknowledgement of the scale of the issue.

We’ve seen investment banks’ forecasts that assume that ARPUs can be (mostly) maintained through the magic of bundling, while some operators themselves paint a picture that can, charitably, be seen as rose-tinted at best:

Figure 4: Orange remains optimistic about European telecoms revenues

Euro Mobile: The Future's Brutal, Orange Forecast, Telco 2.0, October 2012
Source: FT Orange

Contents:

  • The bundling paradox
  • General trends impacting core services revenues
  • Macro-economic issues
  • Competitive & regulatory price pressure
  • The declining demand for voice telephony
  • Data growth
  • The relative mix of pre-paid vs post-paid customers
  • Lower handset subsidies
  • Definitions, assumptions & methodology
  • UK
  • Germany
  • France
  • Italy
  • Spain
  • Europe-wide summary
  • Appendix – Benchmarking prices for core services

 

  • Figure 1 – Mobile core Service revenues
  • Figure 2 – EU5 Mobile Services revenue already down 10% from 2009 peak
  • Figure 3 – Example Telco 2.0 delegate view of 3-year voice revenue decline
  • Figure 4 – Orange remains optimistic about European telecoms revenues
  • Figure 5 – Vodafone view bundling as the way to stem revenue loss
  • Figure 6 – At least 4 of the 6 general trends that impact mobile core services revenues are negative
  • Figure 7 – Developed-market mobile pricing has dropped 10%+ per annum
  • Figure 8 – French, German and Spanish mobile voice has historically had higher prices than other European countries
  • Figure 9 – STL Partners recent analysis suggests that Spain’s voice prices are nearly double those of UK and France
  • Figure 10 – Spanish voice premium is not offset by materially cheaper data charges compared with other European markets
  • Figure 11 – Despite growth over 2005-2010 period, mobile voice volumes are now flattening in more mature markets
  • Figure 12 – The underlying decline in fixed voice minutes (excluding mobile substitution) appears to be around 2% per quarter in the UK
  • Figure 13 – Smartphone penetration of mobile user base, January 2012
  • Figure 14 – EU5 mobile data revenues have grown steadily, not exponentially – and show recent signs of flattening-off as SMS declines
  • Figure 15 – The UK has shown a steady decline mobile data revenue growth rate despite increases in dongles and smartphones
  • Figure 16 – UK Mobile voice volumes (billions of minutes)
  • Figure 17 – UK Baseline Mobile Revenues down 25% from 2011 levels by 2020
  • Figure 18 – Unlike the UK, Germany mobile voice traffic is still growing strongly…
  • Figure 19 – …and mobile data usage in Germany is exploding (from a low base)
  • Figure 20 – Price pressure has meant that German mobile revenues have been flat in the recent past
  • Figure 21 – Germany Baseline Mobile Revenues down 18% from 2009 levels by 2020
  • Figure 22 – French mobile telephony volumes are still rising
  • Figure 23 – SMS and mobile data traffic volumes growing strongly
  • Figure 24 – France Baseline Mobile Revenues down 35% from 2009 levels by 2020
  • Figure 25 – Italy Baseline Mobile Revenues down 46% from 2009 levels by 2020
  • Figure 26 – Spain has been hurt especially hard by WhatsApp
  • Figure 27 – Spanish mobile voice traffic has been flat, but now faces decline
  • Figure 28 – The Spanish mobile market will fall precipitously through to 2020
  • Figure 29 – Total EU5 mobile core services revenues will fall 38% from peak by 2020
  • Figure 30 – Spain and Italy, in particular, are likely to experience a major decline in core mobile services revenues
  • Figure 31 – Mobile Voice Telephony Revenue Forecast by Country 2012-2020
  • Figure 32 – Extract from STL Partners database of 30-day SIM-only bundles
  • Figure 33 – Extract of how unit prices were calculated by STL Partners

 

Mobile Broadband 2.0: The Top Disruptive Innovations

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

Trends in European data usage

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

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Introduction

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

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

Under The Floor (UTF) Players Telco 2.0

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

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

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

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

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

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

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

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

Telco-driven disruption vs. external trends

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

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

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

External disruptions to monitor

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

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

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

Some of the areas being followed by Telco 2.0 include:

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

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

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

The mobile data explosion… or maybe not?

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

A J-curve or an S-curve?

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

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

Figure 1 – Trends in European data usage

 Trends in European Data Usage
 

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

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

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

Figure 2 – A plethora of mobile data traffic management solutions

A Plethora of Mobile Data Traffic Management Solutions

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

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

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

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

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

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

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

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

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

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

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

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

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

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

…and the following figures…

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

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

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

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

Full Article: Online Video Usage – YouTube thrashes iPlayer, but for how long?

Online Video consumption is booming. The good news is that clearer demand patterns are beginning to emerge which should help in capacity planning and improving the user experience; the bad news is that an overall economic model which works for all players in the value chain is about as clear as mud.

We previously analysed the leffect of the launch of the BBC iPlayer on the ISP business model, but the truth is that, even in the UK, YouTube traffic still far outweighs the BBC iPlayer in the all important peak hour slot – even though the bitrate is far lower.

Looking at current usage data at a UK ISP we can see that the number of concurrent people using YouTube is roughly seven times that of the iPlayer. However, our analysis suggests that this situation is set to change quite dramatically as traditional broadcasters increase their presence online, with significant impact for all players. Here’s why:

Streaming Traffic Patterns

Our friends at Plusnet, a small UK ISP, have provided Telco 2.0 with their latest data on traffic patterns. The important measurement for ISPs is peak hour load as this determines variable-cost capacity requirements.

iplayer_7_days.PNG

iPlayer accounts for around 7% of total bandwidth at peak hour. The peaks are quite variable and follows the hit shows: the availability of Dr Who episodes or the latest in a long string of British losers at Wimbledon increase traffics.

Included within the iPlayer 7% is the Flash-based streaming traffic. The Kontiki-P2P based free-rental-download iPlayer traffic is included within general streaming volumes. This accounts for 5% of total peak-hour traffic and includes such applications as Real Audio, iChat, Google Video, Joost, Squeezebox, Slingbox, Google Earth, Multicast, DAAP, Kontiki (4OD, SkyPlayer, iPlayer downloads), Quicktime, MS Streaming, Shoutcast, Coral Video, H.323 and IGMP.

The BBC are planning to introduce a “bookmarking��? feature to the iPlayer which will allow pre-ordering of content and hopefully time-of-day based delivery options. This is a win-win-win enhancement and we can’t see any serious objections to the implementation: for the consumers it is great because they can view higher-quality video and allow the download when traffic is not counted towards their allowance; for ISPs it is great because it encourages non-peak hour downloads; and for the BBC it is great as it will potentially reduce their CDN costs.

youtube_7_days.PNG

YouTube traffic accounts for 17% of peak-hour usage – this is despite YouTube streaming at around 200kbps compared to the iPlayer 500kbps. There are about seven times the amount of concurrent users using YouTube compared to the iPlayer at peak hour. Concurrent is important here: YouTubers watch short-length clips whereas iPlayers watch longer shows of broadcast length.

P2P is declining in importance

The real interesting part of the PlusNet data is that peak-hour streaming at around 30% far outweighs p2p and usenet traffic at around 10%. Admittedly the peakhour p2p/usenet traffic at Plusnet is probably far lower than at other ISPs, but it goes to show how ISPs can control their destiny and manage consumption through the use of open and transparent traffic shaping policies. Overall, p2p consumption is 26% of Plusnet traffic across a 24-hour window – the policies are obviously working and people are p2p and usenet downloading when the network is not busy.

Quality and therefore bandwidth bound to increase

Both YouTube and the iPlayer are relatively low-bandwidth solutions compared to broadcast quality shows either in SD (standard definition) or HD (high-definition), however applications are emerging which are real headache material for the ISPs.

The most interesting emerging application is the Move Networks media player. This player is already in use by Fox, ABC, ESPN, Discovery and Televisa — amongst others. In the UK, it is currently only used by ChannelBee, which is a new online channel launched by Tim Lovejoy of Soccer AM fame.

The interesting part of the Move Networks technology is dynamic adjustment of the bit-rate according to the quality of the connection. Also, it does not seem to suffer from the buffering “feature��? that unfortunately seems to be part of the YouTube experience. Move Networks achieve this by installing a client in the form of a browser plug-in which switches the video stream according to the connection much in the same way as the TCP protocol works. We have regularly streamed content at 1.5Mbps which is good enough to view on a big widescreen TV and is indistinguishable to the naked eye from broadcast TV.

Unlike Akamai there is no secret sauce in the Move Networks technology and we expect other Media Players to start to use similar features — after all every content owner wants the best possible experience for viewers.

Clearing the rights

The amount of iPlayer content is also increasing: Wimbledon coverage was available for the first time and upcoming is the Beijing Olympics and the British Golf Open. We also expect that the BBC will eventually get permission to make available content outside of the iPlayer 7-day window. The clearing of rights for the BBC’s vast archive will take many years, but slowly but surely more and more content will be available. This is true for all major broadcasters in the UK and the rest of the world.

YouTube to shrink in importance

It will be extremely interesting to see how YouTube responds to the challenge of the traditional broadcasters — personally we can’t see a future where YouTube market share is anywhere near its current level. We believe watching User Generated Content, free of copyright, will always be a niche market.

Online Video Distribution and the associated economics is a key area of study for the Telco 2.0 team. 

Full Article: BBC’s iPlayer nukes “all you can eat” ISP business model

The UK’s largest broadcaster finally launched its online video streaming and download service on Christmas Day. Plusnet, a small ISP owned by BT,  has provided a preliminary analysis of the traffic and the results should send shivers down the spine of any ISP currently offering an unlimited “all-you-eat” service.

The iPlayer service is basically a 7-day catch-up service which enables people who missed and didn’t record a broadcast to watch the programme at their leisure on a PC connected to the internet. The iPlayer differs from any other internet-based video service in certain key respects:

It is funded by the £135.50 annual licence fee which pays for the majority of BBC activities.

  1. The BBC collected 25.1m licence fees in 2006/7. No advertising is required for the iPlayer business model to work.
  2. It is heavily promoted on the BBC broadcast TV channels. The BBC had a 42.6% share of overall UK viewing in 2006/7 and therefore a lot of people already know about the existence of the iPlayer after one month of launch.
  3. it is a high quality service and is designed for watching whole programmes rather than consumption of small vignettes.

This is sharp contrast to the current #1 streaming site, YouTube.

A massive rise in costs

The key outputs from the Plusnet data is that in January:

  1. more customers are streaming;
  2. streamers are using more; and most importantly
  3. peak usage is being pushed up

This equates for Plusnet to streaming cost increasing in total to £51.7k/month from £17.2k, or an increase of 18.3p/user from 6.1p/user. This is a 200% cost increase in just the first MONTH of the service. If we assume that the Plusnet base of 282k customers is a representative sample of the whole UK internet universe than we can draw some interesting conclusions about the overall impact of the iPlayer on the UK internet. On the whole UK IPstream base of 8.5m the introduction of the iPlayer would equate to an increase in costs to £1.5m in January from 500k.

Despite access unbundling, ‘middle mile’ costs remain a key bottleneck

IPstream is a wholesale product from BT, with BT being being responsible for the transit of the data from the customer’s home to an interconnect point of the ISP’s choice. The ISP pays for bandwidth capacity at the point of interconnect. BT Retail acts like an external ISP in the structurally separated model. The overall effect of the iPlayer for the BT’s IPstream-based customers is roughly neutral, with the increase in revenues at wholesale (external base of 4.2m customers) being offset by the increase in costs at BT Retail (total base of 4.2m customers). Of course, this assumes no bandwidth overages at BT Retail, which probably is not the case as both BT and Plusnet have bandwidth caps. In effect, incremental cost for ISPs using the IPstream product is determined by ordering extra BT IPstream pipes which come in 155-meg bit size chunks. The option for the ISP is either to allow a degradation in performance or order more capacity.

Time to buy more pipes

We tested the bandwidth profile using Wireshark watching a 59mins documentary celebrating the 50 year anniversary of Sputnik with both streaming and P2P. The streaming traffic is easy to analyse as it comes through on port 1935, which is the port used by Flash for streaming. Basically a jitter-free screening ran on average at around 0.5Mbit/sec. Using the 155-meg ordering slice this means only around 300 people need to be watching the iPlayer at the same time (peak = 8pm-10pm) to fill a pipe. Seeing that IPstream customers are aggregated across the UK to a single point, a lot of ISPs will be thinking of the need to order extra capacity. The BBC also offers a P2P download which is of higher quality than the streaming. We managed to download the 500Mb file in just over 20 minutes at an average speed of 3.5Mbit/sec. The total traffic (including overhead) for the streaming was 231MB and for the P2P delivery was 544Mb.

Full unbundling still leaves ISPs at the mercy of backhaul costs

The story for facility-based LLU(Local Loop Unbundling) players, which account for another 3.7m UK broadband customers, is slightly different as it depends completely on network design and distribution of the base across the exchanges. Telco 2.0 market intelligence says that some unbundlers have ordered 1-gig links for the backhaul and should be unaffected least in the short term. However, some unbundlers have only ordered 100-meg links and could be in deep trouble with peak hour people really noticing the difference in experience. The only real option for these unbundlers is to order extra capacity on their backhaul links which could be extremely expensive. The average speed for someone just browsing and doing emails is quite low compared to someone sat back watching videos stream.

Cable companies understand sending telly over wires

The story for Virgin Media, which is the main UK cable operator with 3.3m broadband subscribers, is again is dependent on network design. This time it depends upon the load on the UBR(Universal Broadband Router) within the network segment. Virgin Media have a special angle to this as the iPlayer will be coming to their Video-on-Demand service in the spring, and therefore we assume this will take a lot of load off their IP network. The Virgin VoD service runs on dedicated bandwidth within their network and allows for the content to be watched on TV rather than PC. A big bonus for the Virgin Media subscribers.

Modelling the cost impact

For both cable and LLU players the cost profile is radically different to IPstream players, and it is not a trivial task to calculate the impact. However, we can extrapolate the Plusnet traffic figures to note the effect in volumes of data. We have modelled four scenarios: usage the same as in Jan 2008 (i.e. an average of 19min/month/user) rising to 1 hour/month, 1 hour/week and 1 hour/day. These would give an increase in cost of £1,035k/month, £3,243k/month, £14,053k/month and £98,638k/month respectively for the IPstream industry, only based upon Plusnet cost assumptions. Of course this is assuming the IPstream base stays the same (and they don’t just all go bust straight away!). Across the whole of the UK ISP industry, the increase in traffic (Gb/month) is 1,166, 3,655, 15,837 and 111,161 respectively. That’s a lot of data. The obvious conclusion is that ISP pricing will need to be raised and extra capacity will needed to be added. The data reinforces our belief expressed in our recent Broadband Report that “Video will kill the ISP star”. The problem with the current ISP model is it is like an all you can eat buffet, where one in ten customers eats all the food, one in a hundred takes his chair home too, and one in a thousand unscrews all the fixtures and fittings and loads them into a van as well.

A trigger for industry structural change?

An interesting corollary to the increase in costs for the ISPs is that we believe that the iPlayer will actually speed up consolidation across the industry and make the life of smaller ISPs even more difficult than it is today. Additionally because of the high bandwidth needs of the iPlayer, the long copper lengths in rural England and the lack of cable or LLU competition to the IPstream product, we believe that the iPlayer will increase the digital divide between rural and suburban UK. The iPlayer also poses an interesting question for the legion of UK small businesses who rely on broadband and yet don’t have a full set of telecommunications skills. What do they do about the employee who wants to eat their lunch at their desk whilst simultaneously watching last nights episode of top soap EastEnders?

Time to stop the game of ‘pass the distribution cost parcel’

The BBC is actually in quite a difficult situation, especially as publicity starts to mount over the coming months with users breaking their bandwidth limits and more or more start to get charged for overages. The UK licence payers expect they paid for both content and distribution when they handed over £133.50. In 2006/7, the BBC paid £99.7m for distributing its broadcast TV signal, £42.6m for its radio signal and only £8.8m for its online content. This is out of a total of £3.2bn licence fee income. I would suggest that the easiest way for the BBC to escape the iPlayer conundrum is for them to pay an equitable fee to the ISPs for distributing their content and the ISP plan comes with unlimited BBC content, possibly with a small retail mark-up. The alternative of traffic-shaping your users to death doesn’t seem like a great way of creating high customer satisfaction. The old media saying sums up the situation quite nicely:

“If content is King, then distribution is King Kong”

[Ed – to participate in the debate on sustainable business models in the telecoms-media-tech space, do come to the Telco 2.0 ‘Executive Brainstorm’ on 16-17 April in London.]