US bill heralds end of walled gardens

Original URL: https://www.theregister.com/2005/10/03/collapse_of_walled_gardens/

Market will kill them anyway

Posted in Networks, 3rd October 2005 11:46 GMT

Analysis The draft telecomns reform bill released by the House Commerce Committee last week would ban fixed or wireless carriers from limiting access to content and applications, which would make it difficult for wireless carriers to keep their walled gardens.

The House draft, an important first step in the telecoms reform process, replaces the distinction between telecoms and information services with a single category - broadband internet transmission service (BITS) providers. It would not allow content blocking, except to conserve network capacity “it this is deemed reasonable”, a term that should be further defined by the FCCs.

Legislation will only accelerate a process that is inevitable anyway as customers grow to expect open access and flat rate pricing on their cellphones as well as on their PCs. Cellular operators, like the original internet service providers, will have to accept that they cannot keep subscribers penned in, but will have to compete for their loyalty and dollars with genuinely compelling content and applications.

To date, operators are displaying mixed behaviour, ranging from the wilfully blind – like Hutchison’s closed garden, which it justifies with claims that it does not see demand for open access; to the defensive, with some cellcos looking to block services such as VoIP; to the creative, where operators are building the content and services partnerships that could enable them to charge decent rates and keep ARPU high even in the open IP world.

Network capacity

The 3G network owners, while they have little prospect of making as much ARPU for data and content as they once hoped for, when they believed 3G would be the only mobile data game in town, do have the advantage of a highly efficient technology, whether UMTS or CDMA, that can reduce the costs of delivering even basic services like voice considerably. We have already seen Vodafone Germany promising a low cost, flat rate voice rate within a user’s ‘home zone’, a move that takes advantage of 3G’s efficiencies to challenge VoIP on cost and flat rate convenience.

When the large cellcos bid for their licenses, they hoped the efficiency of 3G would enable them to deliver basic services more cheaply, while keeping tariffs reasonably stable, and topping them up with new data offerings. Now those hopes for the profit margin have been dashed by Wi-Fi and the approach of WiMAX, but the mobile providers can at least comfort themselves with the idea that they can deliver voice and some other services more efficiently than the IP companies, and in many cases will offer a better experience (particularly in the case of VoIP versus circuit switched voice on a cellular network).

The problem for cellcos is that open access will overload their networks and force them to invest further in capacity, without necessarily gaining a share of the content providers’ revenues. In this context, a fine balance will need to be drawn between control and openness, and the mobile operators will need to learn how to create ecosystems with a range of content partners – a skill in which IP players are already well ahead of them.

Those that can succeed in this will reap far greater rewards than they will by maintaining the walled garden or blocking other services. This seems to be a lesson Vodafone has learned, with its German unit backing away from plans to block VoIP from its network. The Germany subsidiary said earlier this year that it would block VoIP calls from its network from 2007 but last week the company’s group CTO said there was “no long term sustainable business case” for blocking.

After all, European mobile operators still charge for data – including VoIP – by usage rather than on all-you-can-eat basis (although that is sure to change gradually under pressure from Wi-Fi). Therefore, subscribers using VoIP services such as Skye over the cellular networks are paying the data charges, one reason why many critics believe the partnerships of free VoIP options with cellcos – like Skype’s with Germany’s E-Plus - will not work.

CTO Thomas Geitner said: “Are we legally in a position to put in filters against VoIP? Well, I wouldn’t think anybody today would say we couldn’t do that. But clearly building a business case around this would not be a long term, sustainable strategy. Our view is we need to make sure we are cost competitive rather than trying to stop voice over IP.”

Content policies

On the content side, cost competitiveness will be important too, but more significant will be attracting unique and appealing partners. In some ways, the MVNOs, which lease capacity on a partner’s network to offer a highly branded service to a targeted demographic group, have a headstart.

The successful MVNOs, such as Virgin Mobile and ESPN Mobile, have already attracted a loyal customer base with their core products and so will have an easier task of building a well targeted content base. For a content owner like sports channel ESPN the job is particularly easy, since it can keep certain premium services exclusive to its network. Apple’s iTunes music store will be an important content offering for its cellco partners such as Cingular, but would have an even more powerful impact if Apple were ever to prove persistent rumors true and launch its own MVNO centered on the music platform.

Some cellcos are starting to formulate credible content and data policies. A good example is Nextel’s Boost pre-paid service, which is specifically targeted at teenagers. It boasts ARPU of $41 a month, double the average for pre-paid services. Its differentiators serve as an object lesson for other carriers – it boast strong segment marketing and understanding of its target base, a wide range of downloadable Java applications appropriate to the brand, plus Nextel’s signature push to talk service, which accounts for about 25% of the $41 figure.

Such well targeted platforms are only possible with the right content partners, and these partners are also the chief way that cellcos could keep their users off the open internet for at least part of the time. As the internet over other media has shown, it is extremely difficult to compete with free content, but there are some methods that work – users will still pay for material with a high perceived value, either in information or brand terms, that is not available freely; and for advertisement-free delivery. To offer these advantages, operators must make close alliances with key content providers – which is likely to mean being more generous than most currently are.

Vodafone, for instance, is locked in battles with content providers over revenue splits, but refuses to shift from its basic 50:50 arrangement – although the cellco did recently agree to invest in a major marketing drive around its key partners.

The i-Mode approach

It is surprising that more operators have not emulated the most successful mobile content platform to date, NTT DoCoMo’s i- Mode. DoCoMo set up i-Mode as a system to encourage mobile content generation by promising nearly all of the revenue to the content providers, and just taking a small piece (about 10 per cent) for itself. That actually encouraged content providers to offer their content on mobile offerings, increasing the overall pie size for everyone.

The problem with less generous schemes is that content providers are lukewarm about going mobile at all, and so the operator has an unimpressive range to offer, pushing the users back to the open internet again – and the risk of swamping the network with free downloads.

Walled gardens

In the face of this dilemma, some operators are clinging for as long as possible to the walled garden. While T-Mobile recently announced a fully open internet access service for its European networks, called web ‘n’ walk and including Google search and a choice of start page, Hutchison only allows access to its own portal.

T-Mobile is taking the view that it must accept that data ARPU will be squeezed by open IP services, but that this must be balanced by reducing costs and decreasing churn. The former is achieved by axing the division that was responsible for creating and populating the T-Zones portal, with the cellco now relying mainly on direct offerings from content partners.

The latter should follow from offering customers what they want in terms of open access, though a friendly user interface will be essential. Vodafone takes the middle ground, marketing its Live! portal and its content suppliers aggressively but allowing open access – if users can work out how to use it. While T-Mobile’s greatest risk factor in web ‘n’ walk is the poor user experience that is usually the downside of open access – especially since most web sites are not yet optimized for mobile devices – Vodafone aims to turn that risk into a positive, by highlighting the contrast in experience between Live! versus open access.

"Vodafone's strategy has subtly shifted away from hiding the gates of the garden or growing large bushes in front of them, to making it clear that users can go outside, but why would they want to?," said John Delaney, a principal analyst at Ovum, in a recent interview. This effect is enhanced because customers pay for data traffic when outside the Live! portal but incur no fees for browsing within the portal, until they choose to buy a piece of content.

Clearwire

It is not just the mobile operator that needs to find a way to keep customers in the garden by choice rather than force. The very breed of provider that threatens the cellcos’ grand plans, the mobile broadband ISP, also has to find a way to make money from content and applications even in an open environment.

Ambitious pre-WiMAX start-up Clearwire has repeatedly stressed that competing on price will be a losing model for broadband wireless and operators must rely on finding attractive added value applications that generate premium rates. However, most of these will rely on next generation equipment with full support for mobility, advanced video and so on.

In the meantime, Clearwire has been defensive around services like VoIP, facing the same dual threat as the cellcos do from open IP services – that these will overload the network without generating revenue for the network owner, and that they will steal customers from the operator’s own services. The controversy over Clearwire’s alleged blocking of third party VoIP services has been ongoing for some months, with the broadband wireless provider now saying such offerings must be certified to guarantee they will not be kicked off the system.

Clearwire, which will launch its own VoIP services later this year as part of its alliance with Bell Canada, was accused earlier this year of blocking Vonage and some other offerings but now said this was accidental, and would be avoided by the partner program. In March, the company said it wished to preserve stable performance by excluding bandwidth greedy applications such as streaming audio and video or high traffic web site hosting, and also including VoIP.

This was an argument that did not reflect well on Clearwire either way – if true, it threw doubts over the robustness of its first generation network pre-WiMAX network (although this is being upgraded soon, with better support for streaming services one of the features, and presumably as a prelude to making the Bellhosted VoIP functions live). If this was just an official line, then Clearwire was behaving defensively in blocking a rival, a policy that is increasingly unlikely to find favour with regulators or legislators.

With the Congress proposals veering towards open access, the regulator, too, is getting impatient about blocking. Vonage previously won a battle with a local telco, Madison River Communications of Mebane, North Carolina, which was blocking its VoIP service. Madison River had to pay a $15,000 fine.

The latest line from Clearwire is that it will set up a partner program to certify services and ensure that these are not blocked “inadvertently”. Clearwire’s CTP Rob Mechaley told the VON conference in Boston last week that the ‘Clearwire Certified’ program would kick off on September 30. It will enable VoIP providers to exchange technical detailswith Clearwire so that the service provider can better manage its network.

According to Mechaley, Clearwire had not deliberately blocked any service but said: “To us, VoIP traffic can sometimes look like a port scanner taking over a computer”, a mistake that could be avoided with more detailed knowledge of the partners’ systems. However, some saw the certification program as a way to keep control and, potentially, to exclude certain services by not offering membership of the program.

These debates and dilemmas will persist for the next few years, as service providers work out their new models and form their content partnerships and as WiMAX becomes mature. US proposals to ban carriers from limiting access to content and applications will no doubt be emulated elsewhere and will accelerate the process, but even without legislation, consumer behavior has changed too much to allow any outcome but the collapse of the garden walls. What is less certain is which providers will adapt best to the open IP world – and ironically, it will not always be the IP operators.

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