Can Big Telco do Perestroika?
Part 1: Wrestling with IP-zilla
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.
STL's super smart chief analyst Martin Geddes, kicked off proceedings. STL has an interesting approach to brainstorming: once the incumbent operators are seated, shock tactics are applied.
At the previous brainstorm last October, the mobile network operators were greeted with "Ten Things I Hate About You". As a counterpart, the net people were confronted with "Ten Things I Hate About Internet Culture". There was much merit to both arguments.
This generates plenty of feedback - and the audience chimes in with real-time anonymized feedback and questions.
As Day One progressed, the confrontational theme was developed with Geddes's choice of statistics.
IM messaging, he said, threatens to wipe out operator revenue from text messaging. Geddes showed how easy it is to bypass SMS using Vyke, which reroutes the text via IP protocols. (It actually isn't that easy to use; it needs a smartphone, starting a third party program, switching contexts back and forth, and praying the message is delivered: but it's worth doing if you're abroad).
You'll notice that this tactic has much in common with cults. Break them down, so you can build them up psychologically later.
However the operators present at Telco 2.0 didn't need their illusions shattered.
"As an industry," said a strategist at one global mobile operator, "we now need to compete with other industries - there are better and less risky ways (for markets) to make money, such as biotech".
Operators didn't flinch from specifics.
"MMS was a classic example of how we got it wrong," a marketing chief at another mobile operator explained.
"We were seduced by a new technology, cameraphones, and fell for the argument that 'richer experience' is more valuable. We accepted it at a time blip... we now know people don't want to send videos."
(Ironically, it's a mistake the web evangelists are now repeating, with their irrational expectations for "user generated content", you'll note. Home grown videos are proving a niche interest for experimental operators, but hardly a big revenue driver.)
In fact, the operators don't seem believe that change can be prevented. An audience poll (sample size: 300) revealed that most expect to see Wi-Fi in the majority phones by 2010, and mobile VoIP to become mainstream at about the same time. In fact, operators peg the 2009 to 2010 time frame as the period of biggest upheaval, and the most popular choice of word for this was "traumatic".
While change is inevitable, more operators are pessimistic than optimistic that they'll prosper from the IP switch, and successfully shift away from being vertically-integrated monolithic companies to more nimble and open operators. They're certainly more optimistic about their prospects than the fixed-line carriers, who are nervous that IP-TV will be ready and working, and an attractive advertising platform.
The pessimism was tempered by some unusual findings. When researchers canvas opinion outside the industry, they get a more optimistic response. Service companies and content providers are itching for a crack at partnering with operators who can boast a user base of 60m in each of several countries, despite setbacks with the many attempts at 'Walled Gardens'.
The Web or TV simply can't match audiences like that. Advertising companies also think the operators are seriously undervaluing their assets: operators sit on what a gold-mine of personal user data they fail to exploit.
(Whether this is as exploitable as advertisers think is another question. One operator explained that only rarely can you assume that the person holding the handset is either traceable, or the name on the bill. Prepay customers don't leave a fixed address with the operator; commercial customers don't divulge the employee details; and in family plans, you have to guess who's got which number.)
But Geddes made a telling point. If voice revenues are squeezed by VoIP, there are plenty of other opportunities.
Operators make money on the voice call today, said Geddes, but many of these calls are calls the network would rather we didn't make. Instead, they should make money before and after the call. How many of us, he asked, have to write down a phone number on a piece of paper during a call? Why isn't there a simpler way of sending a number during a call?
When asked, users want lots more information that carriers are either failing to provide, and better services. Topping STL's poll was presence "metadata" about the recipient. Were they busy? Users also wanted better directory services from their operators, which means "better address books".
Even in the IP world, which after 15 years of web innovation, such services don't appear by magic. The internet doesn't have credible (i.e., spam proof) identity services or address books, and isn't likely to in the near future. (The flavour of the week, OpenID, is a spammer's delight).
At least one participant was aware of another tool in the the telco's favour. "How long before Google has to partner with telcos to deliver an acceptable end user quality of experience?" one attendee asked the Adzilla speaker, who was sadly absent through illness.
Do androids dream of near-field shopping coupons?
Telco 2.0's emphasis on shock tactic does have its downsides, however.
Near field electronics was hardly mentioned, but this technology in every phone will make many transactions, of various kinds, much easier. Not just shopping, but something as simple as exchanging business cards, can be achieved with a simple tap (or swipe). With today's Bluetooth, it's so tedious hardly anyone bothers.
Nor is there much awareness of the potential of legal P2P. I didn't hear a blanket license mentioned once - which is astonishing, considering that France nearly voted to legalize P2P file sharing with a compulsory tariff on ISPs (and mobile operators) last year.
This potentially represents a huge opportunity for incumbents. A flat fee would encourage, not penalize media consumption, but in itself it wouldn't solve any of the problems we have finding and sharing music or video. Therefore, there are countless services, from radio to music discovery, that have yet to be tried.
So things aren't as bad as they seem.
But in managing their own Perestroika, telcos will have to open up to services on mutually agreeable terms. They'll need to simplify APIs, and speed up the access process for bright new service companies. And this we'll examine in the next instalment. ®