Original URL: http://www.theregister.co.uk/2012/02/28/ott_telco_special_report/

Silicon Valley's assault on Mobile's Gated Kingdom

Barbarians at the IP gateway

By Andrew Orlowski

Posted in Mobile, 28th February 2012 11:00 GMT

Part one The Gated Kingdom guarded by the mobile industry is the last great frontier for Silicon Valley to crack.

These vast, vertically integrated companies handle much of our communication – and they make pots of money. But standards are set by closed-door cabals of equipment vendors and operators and move at glacial pace, locking out imaginative services and the creation of new markets.

If ever there was an area ripe for disruption, you’d think this would be it.

It’s hard to argue that for the past two decades this closed world has done us much harm. In the 2G era it brought mobile telephony and messaging to every corner of the world at very low cost. That allowed them to blanket the world in ubiquitous, fast data networking.

But 3G and smartphones have changed the dynamic – and can’t keep new entrants out. The seething mass of these "Over The Top" (OTT) players want to climb over the wall and steal the mobile industry's lunch.

SMS brings the operators $153bn every year (according to Ovum), yet a third of iPhone users are using an IP-based messaging app such as WhatsApp. Already Pinger has become the seventh biggest mobile operator in the United States – on the basis of an iPhone app.

Indeed, given the mobile industry’s stumbling attempts to capture revenue opportunities over the past decade, and particularly in the new apps world, it isn’t hard to imagine Facebook and Google becoming the face of mobile - relegating today’s giants to dumb bit pipes and mast maintainers. But just how likely is this?

Well, the industry at least recognises the threat. This week in Barcelona it’s fending off insurgents by touting its RCSe protocols. The first set allows limited access for third parties to the Gated Kingdom but on the industry’s own terms - the protocols were devised by network operators and equipment manufacturers. They’ll allow services like WhatsApp to interoperate with real telephone numbers. Perhaps.

I’ve had a look at the market, the gatekeepers and an innovative platform company in Munich that has a unique perspective on the Gated Kingdom. How it came to crack open the closed world is quite a fascinating tale.

Building a beachhead

A decade ago two Germans were beavering away miles from home - deep in the operations centre of Manx Telecom. They were trying to decipher the mobile industry’s SCCP (Signalling Connection Control Part) protocol used by Manx’s GSM network. It was an unusual place to be, as GSM operations centres were strictly closed to third parties. The pair were senior Nokia executive Ralph Eric Kunz and young engineer Thorsten Trapp. They were surprised by what they discovered.

Although SCCP is considered an "open" ITU protocol, the two developers found it impossible to get an application working that could make sense of the GSM data.

“The GSM specification is a black hole,” explains Trapp today. “Only 90 per cent of it is documented. The only way we could understand it is was by looking at the traffic.”

The two had to decode the traffic. But eventually they succeeded, and in doing so established a beachhead between the GSMA world and the IP world. The pair formed a company, Tyntec, to capitalise on their breakthrough. A long list of companies use it today: Pinger is one of those customers alongside a number of household names that, alas, I’m not permitted to mention. For now we’ll refer to them as extremely well-known Silicon Valley players. Today Trapp is CTO and Kunz left Nokia in 2007 to become Tyntec chairman.

Today Tyntec has greater ambitions. There are markets being created by the the unwashed hordes of innovative IP startups. The telco world moves slowly and vertical integration isn’t going to stop them.

Trapp points to a long history of GSMA standards that were “designed to fail” – such as picture messaging and the uber-architecture IMS. RCSe will be another one, he predicts. Without widespread handset support it’s not going to become ubiquitous, and even if it does, users will be hit by roaming costs and interoperability issues. But OTT players merely need an IP connection for their apps. Their apps are downloaded virally. They’re in with a shout. But they need help.

I found the most intriguing part of the OTT proposition that Tyntec envisages is that it offers telcos a cut of the revenue from new services, and increases demand for their services in unexpected ways.

Pinger’s TextFree makes a good case study.

How mobile operators can profit from OTT

Pinger’s TextFree is hugely popular with US teens, running on iPhone, iPad, iPod Touch and Android gear: its users sent 2 billion messages in January, the company says, and it reached profitability two years ago.

Pinger offers its users a real-world telephone number and they can call anybody in the world.

“The only way to bridge the web with the telephony world is with a real number,” reckons Tyntec’s Giovanni Benini. This has been allocated out of a pool reserved by Tyntec.

It all works thanks to the way termination fees are handled. Tyntec terminates all the calls, and so long as Pinger users receive as many calls from the "network" as they make outside the network, the inbound and outbound termination fees are balanced. A counter on the Pinger app tells the user whether they’re in balance.

Tyntec’s part in this is providing the numbers it has obtained from a huge international pool, but more importantly, because it terminates the calls, divvying up those termination fees. Pinger, which was co-founded by top Palm and Handspring exec Joe Sipher – a voice of common sense in the Valley when I reported from there - also makes money from advertising.

I saw a number of services using Tyntec’s tt.one gateway – which is what it calls the servers that sit in a telco, doing the transcoding and translating between the GSM world and the OTT players. One is online dating, providing anonymous communication. Another is customer engagement marketing, again, providing an ad hoc disposable number that can be called or texted.

And if a small startup Pinger can become the face of mobile – why can’t Facebook? Facebook already has more users than any mobile network, and some people already spend more time inside Facebook than they do watching TV. The signs are that it’s already experimenting with telephony; at Barcelona it’s announced billing relationships with the world’s largest carriers.

And that would have seismic effects on a telco industry anxious about cannibalisation and fretting about data.

Martin Geddes, who founded Telco 2.0 consultancy and has worked at BT and Sprint, lays out the telco’s troubles in a stirring and brutal diagnosis called Peak Telco.

“The traditional vendors are dying. Their multi-year cycle times are hopelessly mismatched to the environment. In their place, a raft of 'internet-time' startups are taking their place, filling in the missing features that decades of neglect of the voice and messaging business have left behind,” writes Geddes.

“You mean I still can’t record and search my calls in 2012? Wow!”

Disruptive Analysis’ Dean Bubley has been writing about the OTTs for as long as anyone, and is bullish about their chances of success. He said: “RCSe was last year’s initiative by GSMA and RCS was four years ago. What we’re really talking about is coalitions of the losers.

“All it takes is one operator to break ranks – like Free Mobile has done in France. One operator has to say, you know what? We’re actually more accountable to our shareholders than the GSMA.”

But there are quite a few pratfalls and potholes standing between the OTTs and industry leadership. Some of these could be fatal. In the next part, I’ll look at a few. ®