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From One Year to the Next
By jpenston | December 12, 2007 |
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No summary of 2007 would be complete without mention of the iPhone and Facebook, so I will get them out of the way. There: they are out of the way. Now that I have dealt with sledgehammers masquerading as marketing phenomenons, I can move on to the more subtle developments that happened in 2007 and what I think they mean for 2008.
For me, 2007 was about the reality of PTT separation, the future of fibre-to-somewhere (but where?), platforms and over-the-top applications & devices. The items that promised to dominate the agenda, like net neutrality and IPTV, were strangely subdued, perhaps by the burden of expectation that they would actually deliver. Today, I will be reflecting on broadband and how separation has changed the landscape.
2007 Brief - Separation Stimulates Broadband
Separation really started to deliver in 2007. The UKs pragmatic move towards separation has led to 3.5m LLU lines (23% of total broadband) and an accelerated consolidation of the ISP market. The second tier is all but gone: PlusNet lives on, but is now a part of BT while PIPEX Internet suffered a far more gruesome fate after its attempts to trigger an auction frightened off all and sundry.
Niches have begin to emerge: BT is about total service, Sky about its TV and Virgin about its cable again (a sign that technology can still be a benefit). TalkTalk and Tiscali are playing the transport game leading the price war into ever darker depths and buying up those they suffocate. Zen lives on, insulated by its excellent and transparent service in an ever shrinking number of players.
BT Keep Going
BT Retail lead the way through consistency and evolution. The evolution has seen the home hub emerge as a central feature with BT making the best use of theirs to simplify connection and support. They are well positioned for their core, more mature and less technically able market.
Disappointingly for the company no doubt, BT Vision has been a failure so far in spite of massive advertising and technical achievement (something Tiscali TV could have perhaps warned them of). It is an overlay service and yet you can only get it on BTs IP Stream based service…?
Feature-wise it is limited too and the service has not worked because it is simply a replacement distribution network that costs more than its predecessor and is more technically complicated. If I want multichannel, I get Freeview or Sky.
The Price War Wounded
TalkTalk stumbled through its AOL integration. That transaction changed Carphone in many ways, for better and for worse - the company stopped acting like a punk kid and got a lot more serious but lost some of its panache as a result. I wonder whether that deal is going to work out for them as I’m sure it confused more than it created.
Tiscali keep confounding the doubters and, unlike Carphone with AOL, are taking the direct approach to integrating an acquired customer base. It will probably work for them too - you sense an edginess about Tiscali keeping them hungry. If you had told anyone 5 years ago that Tiscali would be one of the major broadband players in 2007, you would have got some strange looks, but all credit to them for achieving what they have. Not sure where they go from here though as the squeeze will continue from BT and Sky.
Naive? Yes! Innocent? Hmm…
Virgin were still NTL Telewest on Jan 1. On the 8th February, they became Virgin. The name change was supposed to herald a newer, braver and racier image but they were quickly put in their place. The rebrand was instantly tarnished as a result of trying to take on Sky and coming out second best.
The row made Virgin look petty and naive, but it seems that in recent months they have moved on from that episode and the shambolic ousting of Steve Burch. Under acting CEO, Neil Berkett they have refocused on their core cable assets and have seen customers start to return. They need stability and they can put aside any notion of being bought out now that the credit markets are closed, which should be good for them in 2008.
Sky High?
While Virgin briefly hit the canvass in the bout with Sky, the satellite broadcaster may have been left nursing its wounds too. For all the progress on broadband, it is now it is £60m a year short from Virgin. Furthermore, the TV business is getting more expensive because of competition for rights and the stake it took in ITV has diminished in value substantially. It may yet be forced to sell this at a discount, although James Murdoch will not be there to suffer the humiliation as he has been promoted within News Corp to play with some bigger toys.
On the broadband side though, Sky is going great guns. They are starting to build an effective hedge against the internet replacing broadcast - and now have their seat at the Telco table too from where they can influence how the market evolves. I don’t think Sky really wants the internet to “win”, but they know how to block and tackle as well as how to look good throwing a touchdown pass (this analogy is a Holiday Special for all my American Readers).
That leaves Orange and that’s it.
Poor Orange is stuck deep in French goo. It seems like broadband is actually dragging down Orange mobile and although there have recently been changes there , it seems inevitable that Sky will go soaring past them and continue its pursuit of the big boys. It will notable if and when Sky catches up organically, with the two (CPW and Tiscali) who have reached that size via acquisition.
Six players account for 95% of UK broadband subscriptions. Each has over 1m subscribers so they all have a critical mass of sorts, but I would expect 2008 to see this number reduced to 5 or perhaps even 4. I cannot see France Telecom allowing the situation at Orange to continue with their UK units pulling each other down and the broadband one languishing in sixth place. Tiscali are an obvious target, but an acquisition by Orange in 2008 of CPW should not be ruled out. Alternatively, they could sell the Freeserve / Wanadoo business, but that would be a massive step backwards for what was once a great industry visionary.
O2 and Vodafone are sitting on the sidelines. O2 has of course dipped its toe in the water with Be; it even got its swimming costume on before doing so, but it looks like they are still testing the temperature, unsure of how broadband fits with its core business. Vodafone’s earlier intransigence might yet make Sarin look good compared to rivals who rushed in and are now feeling the chill.
2008 Prospects - Volume Growth Dies
Growth has already slowed down and we are now clearly into a new era. But, it seems that there is also a measure of price stability with the cheap, cheaper, free playground spat well and truly behind us. It is now all about switching customers and stopping your customers getting switched. Because LLU switching has not been required much to date, the process has not been tested, but it will be in 2008. ISPs will need to work out how to do this quickly or there will be trouble.
The TalkTalk base is coming out of contract and people are no longer buying “free”. This poses a considerable challenge for the company and the other price leader, Tiscali especially as both will start to feel the pain of resources that were spent in 2007 integrating acquisitions rather than developing the product.
Expect both to continue along the price leadership path through ever lite-er services, aggressive policing of usage volumes and outsourcing of customer services to cheaper parts of the world. Expect very little in the way of feature development or product innovation but in a harsh economic climate, they are well placed to survive.
Who is Going to do R&D?
R&D is not CPW or Tiscali’s core competence, but innovation is needed in the saturated market. We don’t yet know how far the Telco needs to go beyond the connection, although others are playing out various scenarios. BT is good at R&D, so they deliver the integrated products with upsells that add revenues. Virgin too, on their cable platform can deliver incremental services that generate extra revenue.
Sky has also shown its ability to evolve additional revenues on top of a basic satellite platform, but it remains to be seen how well they can do this over broadband. They sell access today, how are they going to monetise their content on broadband? I think we will find out in 2008.
Step by Step Developments
I expect there to be a major focus on the home network by this time next year. The access market is mature now but is limited by the still difficult process of adding new IP devices that aren’t computers. This is a choke point on the path to video that will start to clear in 2008. The extension of the home hub will increasingly become a valued differentiator which will suit BT.
The other major development I expect to see in 2008 is the emergence of the son-of-IP Stream. The product that will offer an alternative to LLU is long overdue and I expect this to start to make a play in 2008.
I will be looking for signs that BT Wholesale is going to compete against LLU now that it is free to do so. BT Wholesale cannot simply give up the market for wholesale connectivity wherever there is LLU and an IP Stream alternative would allow niche ISPs to extend their competitive reach. How BT play this will be very interesting.
Also in son-of-IP Stream, I expect to see the results of BTs R&D in a wholesale portfolio. Use of BT engineers for home visits, home networking equipment, BT Vision (Wholesale), Multicast, Storage, Backup, Traffic Management. It would be interesting to see whether these also get added eventually to LLU customers too.
Hard Grind
I expect 2008 to be a hard grind for broadband access. Economic conditions look like they are going to be pretty tough so customers are going to be chasing value. On the other hand, customers are also going to increasingly chase service and honesty as a backlash against broken promises from free* unlimited* broadband bulls**t.
BT and Virgin look to be on the right track and I expect them to quietly improve throughout 2008 and maintain their lead over the pack, which will be joined by Sky. Sky look well placed, although they might suffer on the pay-TV side if the economy is really bad.
CPW and Tiscali are in danger of fighting over the scraps and hurting each other in the process so it may be that a merger between the two UK arms is a possibility in 2008. Combined, they would be bigger than BT Retail which might ruffle a few feathers and leave Sky a long way adrift in fourth… As long as Tiscali led the integration project and CPW the public image, it might even work.
Orange…? I cannot see how they can keep up with Sky or catch Tiscali or CPW. Can they run a cash cow and avoid hurting the mobile business? Do they want to play if they are going to be on 7% market share in 6th place? I think that the answer will be revealed in 2008 and it will be a “non”. I expect the Orange broadband unit will be sold off in the second half of 2008, possibly to Tiscali
Stepping Back
O2 and Vodafone look on. O2’s commitment will be tested in 2008. Neither of them are going to win 1 million plus customers organically like Sky without something special and something new, but neither of them have it. Do they want to swap positions with Orange? No, thanks, so they either buy one of the established players or they work out a way to go over the top.
My money is on the latter. We are well on the path towards the sort of consolidation we have seen in the US - where AT&T and Verizon form a virtual duopoly. It is not just France Telecom that doesn’t want to come 6th, no one does.
There is probably an ultimate market structure which supports BT, Virgin and one other at the access level with everyone else either running niche implementations on BTs platform or going fully over the top. We won’t get there in 2008, but we will continue to evolve that way.
Topics: BT, ISP Products, Vigin Media, platforms |
December 12th, 2007 at 7:59 pm
“Virgin were still NTL Telewest on Jan 1. On the 14th February (how sweet!), they became Virgin.”
Actually it was Feb 8.
H
December 12th, 2007 at 8:11 pm
Whoops. Corrected above.
Thanks H
December 13th, 2007 at 9:52 am
Think 3’s continued effort to disrupt its market deserves comment - embracing mobile voip and their mobile broadband product might at least be a leading indicator of a route the other mobile operators could take. Not sure whether there is a realistic chance of a wireless data delivery network competing with the others you mention, in the near future; but given the talk in the US is of Google having a go (different technology I know) its an interesting attempt by 3 to extract value from their network while setting a new pricepoint for “broadband”
Whether 3 itself can capitalise and grow their share or these are the last marketing twitches of a flawed business plan is another debate. If 3 needs a white knight would News International like another multi country delivery platform? Or maybe Google.
cheers