Keith Willetts' Blog

New Markets, New Business Models: Old Competencies

Keith Willetts — Wed, 11 Nov 2009 10:18:00 GMT

If service providers aren’t quick to grab onto new business models and start monetizing them, they may get overrun by the over-the-top guys who will find ways of circumventing them and leaving them to pick up the pieces.

What a busy industry we work in. The range of hot topics keep surfacing like cloud services, smart phones, net neutrality, mobile app stores and over-the-top services as well as continued buzz from LTE and WiMax keeps on coming. Of course, these are increasingly facets of the same thing, which has to do with emerging mobile broadband and how the technology is unlocking whole new markets.

Probably the biggest single thing that the iPhone has done over the past couple of years is to give us a tangible glimpse of what the future might hold. Not so long ago, people debated “so if we provide all of this bandwidth, what are we ever going to do with it?” Not any more; the iPhone and other emerging smart phones give you an insight into the huge range of things you could do with mobile broadband. And we’re beginning to see the problem as not so much filling empty pipes but getting enough bandwidth out there fast enough to satisfy demand.

It’s not just the creativity of the 85,000 plus apps that are available; it’s the level of integration between them (and hopefully the underlying networks too). For example, take Shazam, the application that lets you discover what that song on the radio is, order it through iTunes and then play it on your phone: it’s so much cooler than trying to hum it to some geek in a record store! Mobile broadband creates an almost unlimited set of opportunities for people to deliver goods and services – which are not necessarily new – in an entirely different way.

The rock in the pond with mobile broadband is that it drives a totally different set of thinking, business models, relationships and ultimately money from the mobile voice and messaging world. The fixed Internet has pioneered a rethink on different business models where services are generally free at the point of use. So Google, Facebook and many other useful services cost nothing for us to join and use for as long as we want. But in reality, there’s no such thing as a free lunch; it’s of course the sponsor or advertiser who is footing the bill.

These new business models evolved in parallel with the growth of fixed broadband Internet connections and for a while at least, everyone, including the communications providers, seemed happy with plenty of new revenues and relatively little new cost as Internet services piggybacked on existing voice infrastructure. At least until the tipping point where copper/ DSL has to give way to fiber and the cost of infrastructure is way out of line with potential returns. Cue government handouts, net neutrality debates et al.

So mobile broadband providers can see what’s coming. And for them, their networks are so tightly engineered that there’s no piggyback play here – just more billions to spend on new spectrum, 4G base stations and massively fatter backhaul networks. So there’s no wonder that there is intensive interest in new business models, new services and how the money will flow around.

Over the Top
There continues to be a lot of talk about so-called “over-the-top” services, where companies use existing networks to get to their customers. If you’re riding on top of someone else’s infrastructure, the cost of playing with new business models and ideas is very low - you don’t have to invest millions of dollars and hope it works.

That feeling of being somehow robbed is fairly prevalent in the telecom industry, but actually the feeling exists across the service value chain – many players, especially the content folks, feel that it’s their assets that are leveraging new markets for other people, and somehow it’s not fair. So everyone feels they are under threat from the next guy in the value chain, and everyone is fearful and suspicious of everyone else and their motives.

Of course the key here is collaboration as well as innovation. And you have to admit that while the communications industry remains very innovative at the technology level, it’s not exactly flush with great new ideas at the service level, especially compared to the likes of Apple, Google and Amazon.

Michael Porter once penned a seminal business book on core competencies that basically says that you need to know what you’re good at and what you’re not – leverage the one and minimize dependency on the other. So while I’m not saying that it’s impossible for the communications sector to outgun Apple, Google, Facebook, et al, I’m saying it’s unlikely. But that doesn’t mean that communications companies can’t play to their strengths. They have enormous financial muscle, huge customer bases, unparalleled ability to run five 9s services across hugely complex infrastructure and are chock full of really smart people. But in reality, they’ve spent 100 years enabling people to communicate with each other but leaving it up to their customers as to what to actually say on a call. So what they’re not good at is getting inside the skin of a customer and working out the kind of services they might want to use.

One of their core competencies is enabling and adding value to services that other people can figure out the actual user purpose. And that’s the way I think they should engage in the brave new world of app stores and smart new mobile broadband services.

Social Networking: The Next Generation
One idea that seems to be a great opportunity is to leverage mobile social networking. But how can communications companies make money out of it – isn’t Facebook just another over-the-top application? Well, the interesting thing about Facebook – and why it’s winning the social networking war over MySpace and other rivals – is not necessarily because it’s cooler or better than everyone else; it’s because social networking seems to resolve down to being a natural monopoly. Basically, if all your buddies are on Facebook, why would you consider another site? People tend to flock to the most popular site, and then it’s near impossible to peel them away even if your service is 10 times better.

And that’s how the communications industry can leverage new revenues: by tapping into the concept that if everybody wants to be on the same social network, why not be on the same communications network? Not much appeal to people to do that if every mobile or fixed network just gives them vanilla connectivity, but if the service provider enables a richer user experience by adding interesting new capabilities that help bind the group of friends together tighter than Facebook alone can, then the communications player can start to reap some benefits.

These capabilities might simply be a sort of “Facebook Friends & Family” arrangement, where a group of people could get a better rate as part of a named group. But it could go a lot further than that. Unlocking features like location services into Facebook applications so that friends who are physically near each other can meet up; providing enhanced click-to-talk and messaging services over and above that provided by Facebook itself; conference calling, enhanced voice, click-to-talk facilities that actually work and so on. The idea would be to grow affinity groups that are as loyal to the communications provider as they are to their social networking provider.

Why would this be good? Because customer loyalty drops straight to the bottom line. As TM Forum reported in its latest Insights Research Report on Customer Experience Management, small shifts in customer loyalty can have big impacts on profitability. Loyal customers don’t need tempting with expensive offers to win them back, and they are your best salesperson, recommending your service. And what better to have ever expanding groups of friends telling each other that if they switched to using Facebook on your network, they would get a great rate and extra goodies thrown in.

To make this work properly, mobile providers and social networking market leaders would need to go beyond arm’s length partners and really team up. The service provider gets ‘sticky’ revenues and improved profitability, and the social networking partner would instantly broaden and diversify their user base.

Seizing Opportunities
There’s an old theory that everyone on the planet is connected by only 6 degrees of separation among them; that’s to say you are only 6 friends away from every one of the 6.75 billion (and rising) people in the world. That’s some social network to play for! Not all of these people are using smart phones, but within 2-3 years that number will be 5.5 billion, and the price point for phones with decent browsing capabilities will be very common.

If service providers aren’t quick to grab onto new business models and start monetizing them, they may get overrun by the over-the-top guys who find ways of circumventing them and leaving them to pick up the pieces.

There are lots of other areas where service providers can be enablers. They’re very good at billing and settlements; very good at things like security and authentication and so on. Not every over-the-top application provider is, so by providing application players with more than just bit transport and sharing the revenue (whether or not it’s the end customer who’s paying), there’s a good role for the service provider once they stop thinking of the content and application guys as freeloaders and the enemy. By thinking of them as partners and providing things that they have real competencies in, they can all start to make money – and really capitalize on the mobile broadband revolution!

To Regulate or Not to Regulate – That is the Question

Keith Willetts — Mon, 14 Sep 2009 06:59:00 GMT

The communications services, data and devices of the not-so-distantfuture are relying on us today to make wise choices that won’t have tobe undone and unlegislated just a few years down the road.

We’re very literally at a crossroads in the communications andtechnology worlds today with the coming together of three major piecesof enabling technology: 4G broadband wireless networks; cloud-basedapplications, processing and storage; and ever smarter devices.

Whileit’s easy to view any of these pieces in a vacuum, they are allintertwined and dependent on one another, which naturally brings upinteresting topics for discussion and debate. For example, in JulyApple started pulling applications enabled by Google Voice from its AppStore saying that they duplicate features that come with the iPhone.Well, not long after that, Apple blocked Google Voice itself. GoogleVoice is an IP-based service that gives users (so far in the U.S. only)a single number for all of their phones, voice mail and SMS needs.

Wedon’t know who decided what, but the issue was hardly likely to havegone unnoticed, not the least by Google, whose CEO, Eric Schmidt, wasuntil a few weeks ago on the Apple Board of Directors. But the ripplescontinue to grow with Uncle Sam getting in on the act and writing toApple, Google and AT&T (Apple’s iPhone carrier and distributor inthe U.S.) asking them all for an explanation.

BecauseGoogle Voice would compete directly with the AT&T network,speculation is running high that self-preservation kicked in to blockit. But not only is Apple shooting itself in the foot with end users,but developers are also up in arms about this egregious violation.

Inanother incident that took place in July, interestingly also involvingApple, the company blocked Sprint’s iPhone competitor – the Palm Pre –from syncing with iTunes. The following week, Palm released a WebOSupdate that worked around this roadblock.

Applehas played the part of underdog to Microsoft for so long, and soperfected the art of garnering loyal, even fanatical supporters to itsside, seeing it act (allegedly) in a manner that seems to smack ofcorporate bully-boy seems odd.

Lookingat this from a slightly different angle, another example we’ve seenrecently of commercial interests and wrangling at the expense of usersis the possibility of Skype being shut down. eBay, which bought Skypefor a pretty penny just a few years ago, was trying to sell the companyback to its original founders, who didn’t want to pay what eBay wasasking. But their whip hand is that apparently the founders still ownthe intellectual property for the core technology for Skype - licensedto eBay but never sold – and now they claim eBay has infringed theirlicense.

In an interesting twist, just acouple weeks ago, eBay agreed to sell 65 percent of Skype to a group ofprivate investors that includes Marc Andreessen. Yes, the same MarcAndreessen who founded Netscape! How this changes things is yet to beseen, but it is certainly an interesting development.

Thebigger issue here in my view is that if we are going to have a debateabout an open mobile web, it’s not just the mobile service providerswho need to have a level playing field. All three of the key componentsI described above need to be open, with core standards and codes ofbehavior. But should these be enshrined in law beyond the anti-trustand competition laws we have today? Maybe, but as I’ve said before, themarket moves much more quickly than regulators who often regulate foryesterday’s problems at the expense of tomorrow’s opportunities.

Regulatory Disparity
If you look at all of these recent examples, you’ve got to say toyourself there is a huge double standard happening in the industry.You’ve got people who will yell at whoever will listen that the telecomindustry is distorting the market through discriminatory pricing.Meanwhile, you’ve got Apple and eBay – and doubtless many others – whocan just up and block services on a whim.

Skypehas some 400 million users worldwide and is now the largestinternational telephony provider. Yet it all hangs on a softwarelicense from two guys? This is an outrageous situation, and what’sequally outrageous is that Apple – traditionally a hardwaremanufacturer – is blocking what can and can’t be used on its hardwareto protect its iTunes software!

I’vealways said we need to just step back and let the market do what themarket’s going to do. Either we’re going to say it’s all fair in loveand war and anyone can do anything to anybody and may the best personwin, or we’re going to have some order, some structure and rules andregulations.

The catch here is theserules and regulations can’t just apply to the phone companies becausethey have historically been regulated while the hardware and softwarecompanies have not. It’s also not just a U.S. or a UK discussion;rather this needs a vehicle for discussion globally because iTunes andSkype are both used everywhere. It’s affecting everyone, and surelythese services must be subjected to some sort of scrutiny.

Weall know how heavily regulated communications companies are worldwide,and there are proponents of net neutrality who’d like to see the levelof regulation actually increase. Meanwhile, the other two legs of thestool – the devices and the cloud – have standards in place but noregulations.

It’s a complete Wild Westscenario that brings up some unpleasant questions that need to beaddressed. For instance, if I put my data into a cloud-based service,will I ever be able to get it back out again? Will I ever be able toswitch to another provider? And how can I compare cloud pricing ifthere’s no standard list of features that all cloud services shouldhave. If a particular cloud interface is proprietary, how can Ipossibly shift my data from one provider to the other, and is theconcept of data portability even possible?

Bringing Communications, Devices and Services Together
Trade associations like TM Forum have an important role to play inthese discussions, and we’ve taken the first steps toward addressingcritical issues regarding regulating and managing devices and servicesthat haven’t traditionally been under the long shadow of mandatedgovernment rules.

Ithink now is a great time to start the debate and talk about what todo. The communications services, data and devices of the not-so-distantfuture are relying on us today to make wise choices that won’t have tobe undone and unlegislated just a few years down the road.

FCC takes on Apple. Cause for celebration? Maybe not.

Keith Willetts — Mon, 17 Aug 2009 15:45:00 GMT

I see that the FCC reads our blogs! A couple of weeks ago I bemoaned the naked commercial tactics of Apple blocking Google Voice from its App store (What’s good for the goose is good for the gander) and hey presto, the FCC pops up and calls in the case (read more).

Perhaps this issue has opened the FCC’s eyes to that fact if we’re going to have a debate about an open mobile web; it’s not just the mobile service providers who need to be bound up with net neutrality legislation. We’re very literally at a crossroads in the communications and technology worlds today with the coming together of three major pieces of enabling technology: 4G broadband wireless networks; cloud-based applications, processing and storage and ever smarter devices.

All three of these key components must be open, with core standards and codes of behavior. But should those standards be from the heavy hand of government, enshrined in law? Or should we rely on the market backed up by tough anti-trust and competition laws? As I’ve said before, the market moves much more quickly than regulators who often regulate for yesterday’s problems at the expense of tomorrow’s opportunities and I’m quite sure that Google is more than able to sue Apple rather than letting the government do it for them.

My beef is that communications companies are heavily regulated worldwide - and there are proponents of net neutrality who’d like to see the level of regulation actually increase. Meanwhile, the other two legs of the stool – the devices and the services (increasingly in cloud form) – have standards in place but no regulations. If normal laws of economics can work for software, services and devices, why fetter communications with often outmoded and out of touch legislation. Regulations have lots of unexpected consequences - not least the fact that taxpayers around the world are having to stump up to pay for broadband fiber to be installed - legislation has squeezed any economic lifeblood from fixed access networks preventing normal commerce to invest in them.

The 4G/ cloud based/ app based world we’re entering is reminiscent of the Wild West and brings up some unpleasant questions that need to be addressed. For instance, if I put my data into a cloud-based service, will I ever be able to get it back out again? Will I ever be able to switch to another provider? And how can I compare cloud pricing if there’s no standard list of features that all cloud services should have. If a particular cloud interface is proprietary, how can I possibly shift my data from one provider to the other, and is the concept of data portability even possible?

But just like the Wild West, after a bit of lawlessness, normality takes over and it’s usually market economics that win. Trade associations like TM Forum have an important role to play in these discussions, and we’ve taken the first steps toward addressing critical issues regarding regulating and managing devices and services that haven’t traditionally been under the long shadow of mandated government rules.

I think now is a great time to start the debate and talk about what to do – with or without the FCC. The communications services, data and devices of the not-so-distant future are relying on us today to make wise choices that won’t have to be undone and unlegislated just a few years down the road.

Living in a 4G World

Keith Willetts — Tue, 11 Aug 2009 14:30:00 GMT

3G promised us the mobile Internet but, as ever, the hype got ahead of reality. To be fair, by the time that 3G was finally agreed upon and rolled out, the speeds it offered seemed rather pedestrian, and most industry watchers are now waiting on a 4G world for a truly global, mobile Internet with access speeds capable of supporting the kinds of applications and services that the iPhone is letting us glimpse. And that might happen faster than we think. The 1.5 billion app downloads on iPhone – a tiny fraction of the total mobile phones in the world – has shown service providers everywhere that there really is a market for mobile content and applications.

Now I don’t really want to step into the debate over which flavor of 4G will win – LTE or WiMAX – except to say that I think LTE will be a much simpler operational step for cellular service providers to roll out and be able to play the same kind of staged deployment as they did with 3G where multi-protocol handsets ‘hide’ the initial patchiness of the network infrastructure.

The battle for 4G technology dominance aside, a 4G world will be a very different one from 2G and 3G because several key technologies and approaches are coming together: fast and ubiquitous mobile Internet; powerful smart devices and cloud-based services. Cloud-based services allow the edge of the network (the device) to be smaller, lighter and simpler yet still as powerful because all of the heavy duty applications processing and storage are done inside the cloud. To be useable, it needs fast and reliable communications anywhere the user might be, and hence 4G is a crucial enabler of this approach.

Apart from a large screen and keyboard (and you could Bluetooth to those) why would you need a PC when you have a smart phone and all of your information and applications available online anywhere you go? No wonder Google has targeted its focus on the handset (Android) and netbooks (Chrome). If this scenario came about, it would obviously have very big implications for the PC and software industries as we know them today.

But there are many new issues to worry about too in a 4G world. It’s an all-IP network, so problems like VoIP security and service quality rear their head. In such a radically altered world, what are the implications for charging, settlements and so on? The operational headaches for service providers are likely to grow, so we need to crack on and solve them before these networks become high volume reality, and that starts with the basic infrastructure being manageable in a sophisticated and common way – not having to build different systems to cope with different manufacturers, for example.

But the implications of a 4G world go way beyond this. We may see a complete revolution in the business models underpinning these networks and services. Already we are seeing cracks with so-called over-the-top services bypassing the communications provider’s billing system. Do we see a separation between companies that operate networks and players that operate services and market those to end customers? How will value chains evolve? Even the model for who pays for services may change – already we are seeing more and more ‘free’ applications and content on the iPhone supported by advertising.

Net Neutrality: A Spoiler in the Making?

If we can take one lesson from history to understand a 4G world, it’s that the success of regulation on communications markets has been patchy at best. To me that’s why the whole net neutrality issue looks like one more step along that rocky road where regulators generally regulate by looking back at markets we have had rather than markets that might exist in the future. Free markets usually work well, and ones that are distorted by ‘helpful’ regulators usually don’t.

If a 4G world is totally dependent on high bandwidth, always on, IP connectivity anywhere on the planet, one of the inherent inadequacies at the heart of that structure will be the Internet itself. A 4G world will upgrade the fatness of the pipe, the device you’re viewing content on and business models. But one thing that hasn’t actually changed is the design of the Internet and all of its flaws having to do with service quality and the debate about IPv4 versus IPv6.

There are solutions out there, but essentially we’ve got this ungroomed, unmanaged, uncoordinated world in the Internet and variable quality that will not lend itself well at all to tomorrow’s value-added services where people are depending on the availability of the network to support pretty much everything they do.

Our old friend net neutrality seems to rattle around and around. The bit I don’t understand, especially in such a free market country as the U.S., is why would anyone want to enforce legislation that would prevent those who wanted it to pay for better classes of service? If this was healthcare and President Obama said everyone is going to get basic healthcare with no option for private plans, you can bet there would be rioting in the streets.

But that’s exactly what net neutrality proponents are saying about communications services: that everyone has to have the same thing. Is bringing everyone down to the level of the lowest common denominator really going to serve a world where people may well be prepared to pay for subscription services that give them sporting events on their phones in HD quality? So you have customers asking for this, but you as a provider have to say sorry, we can’t give that to you because the government passed a law that said we couldn’t.

I think the sheer possibility of a 4G world will make the current thinking we have about legislation and regulation seem pretty stupid, but then, that never stopped governments from interfering in the past!

We can only hope that legislators and regulatory bodies understand the potential of a 4G world and do their best to keep their hands off of it. I think only then will real innovation happen and a real evolutionary leap take place.

Arrgghhh - why do service providers cling to ARPU as a meaningful measure?

Keith Willetts — Thu, 06 Aug 2009 11:30:00 GMT

If there is one metric that the mobile industry reveres it is Average Revenue Per User (ARPU). It’s always foxed me why this should be a meaningful measure. After all, mobile markets started with relatively few international business customers at exorbitant tariffs, so as the market moved to more and more of the general population using mobile, ARPU was bound to fall as people paying with their own hard earned cash are likely to be more price conscious. So ARPU is bound to fall where the uptake moves into very price sensitive sectors like children.

Many markets are now at saturation point with little new growth and the name of the game is taking market share from the other guy. It seems to me that managing your business using ARPU as a key guide is even more pointless. The reason is that the only thing that really matters (and it’s a pity that the banks didn’t learn this!) is profitability, not revenue. So as market saturation slows growth, new customers have to be lured away from competitors incurring high customer acquisition costs i.e. - factors such as the cost are handset subsidies, marketing, advertising and promotions.

So keeping as many of your existing customers as possible by ensuring they are satisfied with your service is very important to help drive overall profitability. Concentrating on ARPU alone tends to mask the issue that some customers have a much higher impact on the bottom line.

I’ve been a loyal customer of my mobile provider for over 20 years. Starting with a Motorola DynaTAC 8000X 'brick phone’ and working my way through just about every Nokia, Sony Ericsson, Motorola, HTC and now Apple phone. You would have thought that someone like me who travels the world making loads of calls and downloading lots of data would have been one of those ideal customers for my service provider to hang on to.

But not so. They don’t know I exist. I’ve been having a multi-month long, multi “all our agents are busy” saga with this provider in trying to take advantage of an offer they have to have a second iPhone for your partner on a shared tariff. “But you’re on the wrong billing system sir!” “What – is it my fault which (expletive deleted) billing system I’m on”. “And you say you’ve been with us for over 20 years and are appalled at how awful the service has become – my, my I wasn’t even born then, what was life like in the 80’s anyway?”

You see, they are just concentrating on ARPU – what revenue to I generate, not the profit I generate for them. In a new report that the Forum is writing on Customer Experience Management we stress that concentrating on ARPU alone tends to mask the issue that some customers have a much higher impact on the bottom line. It is widely recognised in many industries that keeping existing customers is less expensive than acquiring new ones and estimates have been made that a 5% improvement in customer retention can cause an increase in profitability between 25% and 85%.

I wouldn’t be so unkind to name the service provider but I live in the UK and they have an exclusive deal to distribute iPhones!

Arrgghhh!

What’s good for the Goose is good for the Gander

Keith Willetts — Tue, 04 Aug 2009 15:07:00 GMT

The news that Eric Schmidt, CEO of Google, has resigned from the board of Apple Inc is generating a lot of headlines. Maybe Apple’s action in blocking access to Google Voice on its app store last week was the straw that broke the camel’s back. But then Apple has form in this area – last month the Palm Pre also got ‘disconnected’ from Apple’s iTunes store.

We also heard this week that Skype, now the world’s largest international phone company with 40+ million users may be turned off in a patent dispute between eBay (Skype’s current owners) and the original developers Niklas Zennstrom and Janus Friis. Now maybe this is all posturing over the value of the potential IPO for Skype ( writes Martyn Warwick) but it and the Apple positioning open up some serious questions about governing the kind of interconnected “4G” world that we are entering.

The “4G” world relies on 3 key ingredients: true mobile broadband available 24X7 anywhere on the planet; super-powerful devices that combine the functions of handset and laptop; and a myriad of ‘cloud-based’ applications and data. This combination, seen in embryo format through the iPhone and 3G networks, will lead to fundamental changes in the way that people work, play, and access and store information. Over the next few years, vast numbers of people will be reliant on this kind of approach for the way they work and live their lives.

In the good old days, the global phone network was the largest ‘machine’ that mankind had ever built – mostly provided by government monopolies for the ‘good’ of society. As this morphed into competitive business, layers of regulation covering universal service, prices controls, open access etc ensured that these vital services remained available to everyone with a high degree of reliability and certainty.

But in the 4G world, the comms part is only one piece of a 3 ring circus where, it seems from recent behaviour that large and powerful companies can act with impunity to chop off services just because they compete with another part of their empire’s business. So, the stakes get higher in that these kinds of services become vital to most people’s lives, yet they get run under a business model that would be very familiar to Al Capone!

The Net Neutrality debate is all about adding more controls and regulation onto the communications part of the triangle and often promoted by companies in the other 2 areas who seem to have little trouble acting in a discriminatory manner. So what goes on?

The rate of evolution of the communications and IT industries since deregulation has been phenomenal just as Adam Smith preached openness nearly 250 years ago: getting rid of barriers results in everyone benefitting. So let’s have a barrier free evolution to a 4G world for the benefit of everyone. Let’s continue the drive to open; standards based structures with minimal interference from legislators and regulators. But at the same time let’s stamp hard on discriminatory behaviour through the courts to stop a few big players distorting the market. And if that’s good enough to regulate the software and device suppliers, surely it’s a sensible way to handle any discriminatory acts by the communications players rather than further weighing it down with more regulation like Net Neutrality.

All Together Now

Keith Willetts — Mon, 20 Jul 2009 09:22:00 GMT

It’s a little known fact that Verizon Wireless used the Beatles song All Together Now in commercials in 2002. So it was interesting to read the words of a current Verizon executive, Jeannie Diefenderfer, vice president of global network operations (NYSE: VZ) in Telephony Online this week talking about “coopetition” – or cooperation among competitors – as a key attribute for successful telecom operations.

“I believe in today’s world, and more so going forward, the ones who learn to master the art of coopetition are going to be the winners” she said. Well it’s good that at least one executive is talking about it because the communications industry has a huge weakness in the new digital economy – fragmentation.

We all saw last week’s report that downloads from Apples app store have hit 1.5bn; that there are now 100,000 developers developing apps for iTunes and the iPhone generates at least 10 times more data traffic than the average cellphone. That’s on a market base of just 40m iPhones and iPods - tiny compared to the global mobile handset market of nearly 4 billion. So why can Apple corner the market for applications? - so much so that Apple CEO Steve Jobs is boasting: “the App Store is like nothing the industry has ever seen before in both scale and quality. With 1.5 billion apps downloaded, it is going to be very hard for others to catch up.”

Well great design and marketing aside, the reason developers are flocking to iTunes is because Apple represents a very simple go-to –market strategy for them - one company to deal to get to a worldwide market – one set of application programming interfaces (API’s), one set of contractual terms and conditions. Compare that to working with phone companies (who by the way earn nothing from all of those apps as the revenue flies ‘over the top’ and the data bandwidth is on an ‘all you can eat’ basis.)

There are roughly 1000 mobile service providers around the world each of whom are busy launching their own apps store and dreaming that it will be an iTunes killer. They will fail – not because it’s not a good idea but because the fragmentation of 1000 sets of API’s, 1000 different terms and conditions and dozens of handset types all with different characteristics kills any kind of value proposition to a developer. Dealing with that complexity is just too hard – especially when both Apple and now Google (with their Android handset platform and their ubiquitous developer platform) make it so much easier to get to market than the underlying service provider.

Digital services are a global market yet the phone business is essentially a patchwork quilt of hundreds of different geographic providers. They created a global seamless telecom network through standards but who haven’t co-operated to create a global seamless digital services platform. If they did they would be formidable - after all they currently enjoy a $1.4trillion market. While they keep themselves weak by competing with each other, the real competition is encircling them before they have even realised that the market has fundamentally shifted. As Diefenderfer hinted – coopertition is the name of the game.

The TM Forum is owned by the world’s communications players and is ready made, global, commercially minded vehicle for collaboration on new and innovative services. Let’s hope that more and more executives can see the light that fragmentation is a killer ad that a bit of co-opetition can unlock huge power to fight the real competition.

All together now?

The Flat-Rate Paradox and the Search for New Business Models

Keith Willetts — Wed, 10 Jun 2009 08:28:00 GMT

Just when you thought it was safe to stream all the video you want and download all the huge files your heart desires, pay-as-you-go charging models are back stalking the land and pressurizing “all-you-can-eat” flat-rate plans.

In April, Time Warner started billing some customers based on how much bandwidth they used. As you can imagine, customers were unhappy when it was announced that the company would expand the trial run of this new billing system. The company relented, but not before saying it really has no choice and needs to come up with a new way of doing business because the current model simply isn’t viable.

Crocodile tears time? Well not really, but we do need to take a look at the paradox that has gotten cable, DSL and mobile broadband providers into this conundrum.

By offering a flat rate for all-you-can-eat data, providers are significantly lowering the barrier to entry for many customers who otherwise might not have signed up. This is especially true for today’s smartphones such as the iPhone. When people hear horror stories of bills for downloading applications and movies, they are very put off using the service. So flat-rate billing has been one of the keys to growth, especially for Apple’s App Store.

So service providers go the flat-rate route and build up their customer base. But here’s the paradox: more customers on your network downloading ever more data creates the need to invest in more backhaul or cell infrastructure at great cost to the operators. So for every new app on the App Store or every movie clip, the service providers get nothing but cost – the ‘over-the-top’ (OTT) provider gets the benefit. So service providers are entering a “screwed if you do, screwed if you don’t” world where it’s becoming very hard to recoup these capital investments in network upgrades. This is the same paradox (with a good deal of regulatory messing too) that has slowed the move from copper to fiber on the world’s access networks.

It’s All about the Apps

So we have a position where all of the new value is being created by OTT players like Apple with none of it going to the underlying providers, be they cable, DSL or broadband. That’s at the heart of the net neutrality debate. But it’s clearly not sustainable if two parties are involved in providing a service but one gets all of the revenues and the other gets all of the costs.

It’s the same thing with mobile advertising. If the advertiser is getting money from a client to deliver mobile ads, what does the phone company get out of it? If all they get are more costs from more data going over their network, don’t expect them to get excited.

Let’s start with the customer who simply won’t put up with huge and unexpected data bills. A recent example that came up at Management World in Nice was a guy travelling abroad and using a neat mobile app to check in online with his airline - when the bill came in it cost the traveler $75 for the roaming charges to check in. Here’s a more personal example: in the first week of having my shiny new UK-based iPhone, I managed to run up over $100 in charges by downloading a few e-mails while on a trip to the U.S.

So good luck Time Warner, but in reality, I’m not sure that you can put the flat-rate genie back in the bottle. We also see mobile broadband providers rolling out bronze, silver, gold or platinum packages with differing data volumes and quality of service included with each, but that’s exactly what the customer, application, web and handset developers don’t want to see.

The Two-Sided Business Model

So what’s the answer? If flat-rate versus pay-as-you-go is an unresolved paradox, how can service providers share in the revenue they are enabling with content developers, application developers and the like?

At last month’s T8 World Summit, which ran alongside Management World in Nice, over 30 CxOs spent time discussing this business challenge. Service providers today are now in danger of falling quickly into the black hole of being only a bit carrier, but there’s still time to salvage their fate. What we were discussing was opening up new services, not aimed at end users this time but at other application and service providers who want to get access to customers and have a range of enabling services available to them. These range from simple transport and other basic services like cloud computing, authentication, security, billing, customer care, etc., all available on a virtual basis.

So instead of just a one-sided business model where you get revenue only from end user customers, the idea is to move to a two-sided business model where application or content vendors and other companies from verticals like government or healthcare supply revenue for the use of those enabling services.

Think of it this way: FedEx will get a parcel from point A to point B. If you also want them to handle the customs process, they’ll do that too for an additional fee. It’s up to you what you want them to do and what you’d like to do as the customer.

The best current example of this is Amazon, whose cloud computing model I’ve talked about before. Not only do they have a massive computing infrastructure for the delivery of goods to customers like you or me, they’ve also extended their internal trading platform to allow third parties to sell their own wares. And they offer a slew of value-added services on top of the basic platform, such as handling payment, delivery and more, allowing the business to decide what to pay Amazon for. They now make a great deal on their income from enabling these third-party traders to do business.

For a small merchant, dealing with Amazon is an easy decision because they are getting access to a global market and very sophisticated services using a single large infrastructure. But that analogy breaks down a bit with telecom and cable companies because they are very fragmented - you’d potentially be dealing with over 1,000 providers to cover the world.

This tells me there are three possible scenarios to all of this: First, it’ll never happen because it’s just too difficult. Second, it will happen because everyone will agree on a set of standards, so a two-sided business model could be ubiquitous. Or third, we’ll see the emergence of intermediaries who sit between the guys who provide the enabling services and the guys who want to use it.

Clearly you don’t have to be a phone company to provide this type of service, but it’s exactly the phone – and cable guys – that need to take a look at how Amazon or Google are leveraging their massive service infrastructures.

A senior telecom executive once said to me, “we had the equivalent of Google in our labs years before they got big”. Five years from now, it would be really easy to see the same missed opportunity for telecom and cable companies and instead of becoming key enablers of the digital economy, they were looking the wrong way and saw applications and ‘OTT’ service companies as the enemy rather than their best potential customers.

Amazon grasped that nettle when they opened up their platform to companies that competed with them at the retail level. But in doing so they not only tapped into wholly new revenues from merchants, they grew their own retail business too because the end customer saw the range of goods available on Amazon growing to nearly always have whatever they wanted – so they made Amazon their first choice for online shopping.

Phone companies and cable companies are really good at a lot of underpinning service issues. They were, after all, the very first ‘online’ service providers. But getting your head around being an enabler, means working closely with people you may regard as the competition at the retail level. Making a fundamental change to your business model is not easy if your company is run by accountants or committees and not charismatic leaders.

It’s not really a surprise that Amazon, Google and Apple all have strong and visionary leaders – anyone care to mention a similar name in telecom?

So What Happened to VoIP?

Keith Willetts — Tue, 21 Apr 2009 13:08:00 GMT

Not sure if you’ve seen Gartner’s technology adoption curve, but it’s a great model for how we treat technological innovations. It describes a ‘peak of inflated expectations’ followed by a ‘trough of disillusionment’ and finally a ‘plateau of productivity’. It’s a good lens to look at what has happened to Voice over Internet Protocol (VoIP).

I first experienced VoIP back in the mid ‘90’s and as the dot-com bubble expanded, VoIP became both the bogeyman of every telecom executive and every journalist’s nail in telecom’s coffin. The ‘peak of inflated expectations’ was that VoIP would kill off the telecom business, and their world would come to a crushing end.

Clearly, somewhat inflated predictions and the great promise VoIP once held seems to be waning. A recent article in the (London) Times quoted a report by British communications regulator Ofcom stating that the percentage of adults using VoIP was just 14 percent in the first quarter of 2008, down from a peak of 20 percent in 2006.

To add further insult to injury, there are rumors floating around that eBay is looking to unload VoIP giant Skype, which it purchased just 4 years ago for somewhere in the $2 billion range. A recent quote from Skype’s CEO said that “it’s a great standalone business” - a huge clue about what’s about to come.

The Empire Strikes Back
This interesting turn of events is pretty unexpected in my opinion. Back in the ‘90s when VoIP was being touted as the next big thing, we imagined it would make significant inroads among multinational businesses and even among individuals who want to call far-off places where circuit-switched calling was cost-prohibitive.

So, did the evil empire strike back or what? It looks like telcos have put a nail into VoIP’s coffin rather than the other way round. How did they do that? After all, as every school boy and girl knows, the Internet is free and a birthright of every citizen! First, rather than being about technology, it’s all about where telcos are in the capital depreciation cycle. Since most circuit-switched voice traffic is running on platforms that are long since fully depreciated, they can price calls how they want because other than using a bit of electricity and labor to run them, the capital costs of these switches have largely been written off.

On the Internet side, however, providers are still paying to put in technology. The end result is that circuit-switched voice providers have been able to price calls very aggressively – mostly at a flat rate these days – so there actually isn’t a huge margin between the cost of traditional calls and Internet calls.

Then we get into issues of quality, which is still a concern with VoIP even after all this time. With a circuit switched approach, you get your very own path end-to-end, but with VoIP, your call is going into this big cloud with no packet priority whatsoever. That’s just fine for email or downloading a video, but on a real-time call, delay and jitter can really screw things up.

And then there’s the convenience factor - with VoIP just not there yet. When you do PC-to-PC calling you’re anchored to your desk. And if one party is coming into the call over a raw IP connection, or there’s a mix of people on the traditional voice network and IP, all bets are off on what kind of call quality you’ll end up with.

Put simply, the key things for VoIP to take off just haven’t happened. VoIP does not have the price advantage over traditional calling, particularly when to save a few dollars you have to compromise on sound quality and the inconvenience of being stuck at your PC.

So What Happened to VoIP?
There’s an interesting bit of Darwinian Theory that dinosaurs evolved into birds. I think that’s what happened to VoIP. Digitizing and packetizing voice calls, just like any other traffic – video, e-mail and so on is just fine provided you know what you are doing. The digital backbones of virtually every telco are based on IP these days– even circuit-switched calls. The core of those calls is all fiber-based packetized technology, but managed and dimensioned in a way that retains call quality.

It’s really only the last mile where there’s a discrepancy and where analog still holds sway. Most mobile calls and the vast majority of fixed line calls still get to their central office in an analog format before getting digitized to get to the other side of the world, and then reconstituted on the phone at the other end. Using VoIP as a bypass means that although the call is digital from end-to-end, it also gets routed in with all of the other Internet traffic and takes it chances on getting delayed with all of those video downloads that your neighbor is doing.

What it comes down to is that quality does make a difference despite all of those pundits who say ‘it’s a new paradigm grandpa”. I liken it to the adoption curve for cell phones. When they first came out, the quality of the calls was appalling. You’d have dropped calls left and right, and sometimes it sounded like the other party was in a tunnel or deep underground somewhere. It was truly awful. But, as with most new technology, the novelty and utility outweighed the annoyance of bad calls, but after a while that shine wears off. Today, cell phones work from just about anywhere, and dropped calls are thankfully few and far between.

Consumers have demanded – and received – higher quality, but that’s exactly what the Internet hasn’t been able to achieve for voice. They simply cannot match price with quality.

It blows apart the myth that people don’t care about quality if something is free. According to that Ofcom report, 73 percent of broadband users are aware of Internet phone service, yet only a small fraction is actually using it.

And in case you suspect I’m a secret Luddite, I’m actually a big fan of Skype. Skype-to-Skype is not only free but is hi-fi quality, which is great and something way ahead of telcos. And because its uses a peer-to-peer approach, the quality isn’t bad either, unlike some other VoIP services I could mention. But I have to wonder how much eBay can get for selling this business - probably nowhere near the hefty price they paid – but what a great bolt-on to Facebook!

So what happened to VoIP? Just like Gartner’s curve, it’s alive and well as a plateau of productivity in the core of (grown up) networks and will soon be happily running end-to-end once Mr. Obama’s billions have put fiber to American homes and 4G wireless takes to the air.

As I said, dinosaurs become birds!

Size doesn’t matter, quality does

Keith Willetts — Wed, 01 Apr 2009 09:45:00 GMT

OK, so I really am the last person on the planet to get an iPhone. Didn't need one you see - had this HTC/ Microsoft brick that had everything that an iPhone had but it had 3G. OK, so the 3G iPhone has been out for a while, but well, what was the compelling reason to change?

Never been an Apple aficionado, so apart from my 2 iPods, never had much to do with their products. But I have to say, what a gizmo! From the super cool packaging to the super cool look feel and the super cool user interface, the whole thing is just, well, cool. Mega cool is their freebie plug-in called Shazam - you hold the iPhone to a radio, it listens to a song playing, tells you what the song is and then lets you download it straight to your phone. How integrated is that!

I suspect that the iPhone has nearly all the same chips in it that the HTC phone has but the way it's put together, they way it is so intuitive to use, the way it just feels so nice, it exudes quality. And as Mr. Jobs bank balance will attest, quality equals premium price equals more personal jet aircraft!

So with that in mind I was musing on the fate of VOIP players. A recent article in the (London) Times quoted a report by British communications regulator Ofcom stating that the percentage of adults using VoIP was just 14 percent in the first quarter of 2008 down from a peak of 20 percent in 2006.

So what's going on? Wasn't VOIP supposed to wipe the floor with conventional voice calls? I guess the evil empire struck back after all with the telcos putting a nail into VoIP's coffin rather than the other way round. How did they do that? Or maybe they didn't - maybe VOIP just did for itself by being inadequate for the task.

Well maybe a bit of both. After all, most circuit-switched voice traffic is running on platforms that are long since fully depreciated and service providers can pretty much price calls how they want because other than using a bit of electricity and labor to run them, the capital costs of these switches have largely been written off.

But the real issue is quality - still a concern with VoIP even after all this time. With a circuit switched approach, you get your very own virtual path from end-end but with VoIP, your call is going into this big cloud with no packet priority whatsoever fighting all those video downloads that are hogging the net. Voice is real-time and real-time call delay and jitter can really screw things up, but then the Bell- heads told the Net-heads that but they didn't listen.

And then there's the convenience factor - with VoIP just isn't there yet. When you do PC-to-PC calling you're anchored to your desk. And if one party is coming into the call over a raw IP connection or there's a mix of people on the traditional voice network and IP, all bets are off on what kind of call quality you'll end up with.

So put simply, VoIP just doesn't have the price advantage over traditional calling to offset the disadvantages and it just gets too hard to mess with after a while on basic VOIP calls.

The real issue isn't with VOIP as a technology - digitizing and packetizing voice calls, just like any other traffic - video, e-mail and so on is just fine provided you know what you are doing and engineer the network to cope. The digital backbones of virtually every telco are based on IP these days- even circuit-switched calls. The core of those calls is all fiber-based packetized technology, but managed and dimensioned in a way that retains call quality.

It's really only the last mile where there's a discrepancy and where analogue still holds sway. Most mobile calls and the vast majority of fixed line calls still get to their central office in an analogue format, before getting digitized to get to the other side of the world, and then reconstituted on the phone at the other end. Using the VOIP as a bypass means that although the call is digital from end-end, but it also gets routed in with all of the other internet traffic and takes it chances on getting delayed with all of those video downloads that you neighbor is doing.

What it comes down to is that quality does make a difference despite all of those pundits who say 'it's a new paradigm" and the world has changed. People will sacrifice quality early in a new product's lifecycle because it may have a utility value that outweighs the problems - mobile phones being a classic example - the early bad quality was offset by the value of mobility. But VOIP services don't have any offsetting values other than price, which service providers have squeezed.

Voice is still a killer app and not just another data stream. Without the right engineering on a fully managed digital infrastructure, it's unusable and that's what ungroomed raw internet connections give you today.

The notable exception to this is Skype, of which I'm a fan and pleased that Skype is now available for my shiny new iPhone! Skype to Skype calls are in hi-fi quality which is great and something way ahead of telcos and because its uses a novel peer-peer approaches, it overcomes many of the poor quality problems of ungroomed VOIP calls. That has allowed Skype to capture 8% of all international calls traffic according to TeleGeography, but probably still a long, long way from being worth the $2 billion plus eBay paid for it.

Rumor is it's on the block and I hope somebody buys it who knows what to do with it.

What a great bolt-on to Facebook!