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Can Big Telco do Perestroika?

Part 1: Wrestling with IP-zilla

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Analysis While the CTIA Wireless jamboree took place in Florida this week, European telcos were drawn in a huddle in London at one of the most intriguing events of the telecoms calendar.

The theme at STL's twice-yearly Telco 2.0 Brainstorm is familiar: "How to making money in an IP-based world". But it has an added piquancy now.

And there's plenty at stake. The part of AT&T formerly known as Cingular, the cellular division, makes more revenue than Google and Intel combined each quarter. But as with all mobile network operators, it's been made from a large, vertically integrated operation, and a fiercely-protected, closed network. The rise of the Internet Protocol stack (IP) changes all that.

IP evangelists can be pretty scathing: IP will destroy the Soviet model; their "Net heads" will triumph over "Bell heads". At stake, they say, is a battle which pits innovation versus atrophy. Unlike the open internet, telecomms provide a barrier to fledgling service providers or application developers. There's no common API, and the service companies need to beg permission.

But there are other ways of looking at it. Mobile telephony - at least in Europe and Asia - is the most successful application of technology since the combustion engine. It's affordable to the poorest, but it feeds the id of the wealthiest fashion victims. Take up is almost 100 per cent - while internet adoption is stubbornly stalled at around 60 to 70 per cent of the Western population, and is seen as little more than a platform for games in much of the world. While mobile operators take a tax from almost all of us, very few of us (outside the US, at least) seem to resent this. And it's perceived as reliable. Rich or poor, drunk or sober - when you push a button, the call gets through. When you send a message, you know it gets delivered. Imagine if that simplicity and efficiency was applied to your local tax rebate bureaucracy - or the financial services industry. And mobile telephony gets cheaper and better every year.

Yet this success story is under direct attack from a very American model of how business should work. This is a model which values abstractions over outcome.

To give you an example of what I mean, this week, I heard more than one person seriously endorse the idea that mobile phones should have two 'send buttons' (that's the green button 'call' on every handset) so we could engage in "dynamic differential pricing". This would delight American economists, but I found myself thinking how I could explain this innovation to a new user down the pub.

Choice is a wonderful thing. But do we need this kind of choice?

Managing away a business from a vertically-integrated command and control model is notoriously difficult. WIth Perestroika, Gorbachev attempted a program of managed liberalization, because he didn't want to throw the baby out with the bath-water - but Gorby was ultimately swept away. Will telcos meet the same fate? Or like IBM, another vertically-integrated, proprietary business once earmarked for death, will they successfully transition?

Broadband is bust

What added the extra dimension to this week's debate is that the Promised Land doesn't looks particularly promising. Operators have feared for years that embracing the IP world would result in them becoming "commoditised bit pipes". Once the access business is open, operators can do little more than compete on price. It's a race to the bottom, and ISPs are feeling the crunch.

Fixed line broadband is in a crisis, as usage is ramping but revenues are flat or declining. HD video represents a steep rise in costs. Last year, the IP Network estimated it costs £2.10 to deliver a full 1080-pixel, HD-quality video (9GB) over the local loop network (read the report, a 128kb PDF and a recent follow-up).

That's before we've seen the likes of the newly-legal Bittorrent and other newcomers like Joost and Babelgum ramp up yet. (And it's going to get a lot worse when internet porn goes High-Def). In Korea, four per cent of users account for 75 per cent of all traffic, yet users stubbornly resist anything other more complicated than flat rate plan pricing. Who but a fool would want to invest in new fibre capacity, when the returns are so poor?

Broadband is kaput, then, and there's no white knight, in the form of public subsidy, riding over the horizon. Western governments are far keener to take money out of the sector, than follow the examples of Korea and Malaysia, and put public money into building infrastructure.

So if there's no pot of gold at the end of the IP rainbow, why even go there?

Here are some notes from the event, which understandably has some reporting restrictions. I wasn't able to quote people directly, nor relay direct quotes conveyed anonymously. Nevertheless, I got a truer and deeper picture of the chemistry of the carrier world, and I'd like to share it with you.

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Next page: Shock therapy?

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