This is part 6 in the Leeds Unbundled ISP (LUI) series that Keith McMahon and I are producing. The aim is to deliver a view on the commercial prospects of a hypothetical ISP, serving a niche community (Leeds in our example).

Before we can properly present the numbers though, we need to describe what those numbers are modelling. We have already looked at backhaul, staffing and our short and medium term product set. Today we look at the biggest variable in the future of our made up ISP: video.

IPTV is better for viewers than broadcast because it is truly on-demand. It gives viewers timeshift capabilities for BBC, ITV, C4, Five and Sky so that they can watch what they want on TV around the rest of their lives. So what is the variable?

While we are confident that video services like YouTube will continue to grow, we are not sure whether mainstream TV will successfully move online because of economic, marketing and technology challenges. IPTV is competing with established digital platforms (satellite, cable and freeview) that already penetrate 18m homes (more than have broadband). Getting mainstream TV online means replacing these distribution networks with the internet.

Consider the scale difference between the two extremes of service adoption: YouTube consumption is a few minutes at a time, a few times a week. TV is 25 hours per household per week. YouTube is currently 200kbps, IPTV as a vehicle of HD means 10Mbps.

There is very little that LUI can do to make any money from YouTube, but conversely, once we have our gigabit backhaul links in place, we are not too concerned about the cost of carrying its traffic. If they cranked up the resolution to the levels used by Veoh (700kbps), we might be a bit more concerned but as it stands, we are happy enough to carry the traffic.

What cannot be allowed to happen is for us to end up in a situation where we are a simple transport network for everyone else's broadcast-replacement services. Our commercial model, and that of every other ISP in the world, is based on carrying relatively small files (peak traffic over total users equals around 35kbps). TV viewing moving over to the internet and adopting HD resolutions will make this closer to 5.5Mbps (159 x the current dimensioning).

This needs to be paid for and the value is in the content: people buy music, video and TV. They don't buy bits and bytes. This means that we need payment for our bits and bytes bundled with the payment for the music, video and TV services. This means adopting a Fed-Ex model for superfast delivery of premium, newly released content and ad supported models for the rest.

Will this happen? Maybe, but only if the economics are right - we know that IPTV offers better functionality than broadcast because the internet uplink opens new doors for interactivity. With the public becoming disillusioned with telephone based interactivity on TV we think that the internet can rescue what had until recently been a popular genre of content.

Furthermore local loop speeds of 20M or so means HD at 1080p is practical and can be made available on demand. It's all technically possible but all these developments will only be attractive at a price point that is competitive with broadcast.

So where does that leave LUI?

Nowhere, right now at least. We just have a basic access service with some customers on CPS. Next up dev wise is the photo blog (due Q4 2007) and starting work on the softswitch (due 2008 perhaps). Enhancements to the photo blog and community stuff are mid 2008 launches.

We looked at buying in a wholesale IPTV service, even before we unbundled the access service. When Tiscali bought HomeChoice, we heard some suggestions that the HomeChoice platform would be wholesaled alongside Tiscali's LLU platform. While the attractions were obvious, the differential advantage was not, so we rejected that option.

More recently, we have looked at Iliad's platform and the service that Fastweb offers with a view to buying that in lock, stock and barrel. These are not currently deployed in the UK and although we could overcome the competitive issue to some degree, we just felt a little underwhelmed by the idea of taking something that had been done before.

LUI wants to do something a little differently and has to exploit our core concept: our localness. For LUI, IPTV has to be build around the community, but we also have to remember that it is still essentially a distribution network for mainstream TV that replaces the satellite dish, cable or freeview aerial in the home.

LUI's problem is that our customers can get all that from other operators, notably Sky & HomeChoice, so where we need to be different is in the EPG. We need to offer social networking in the EPG that exploits our localness and the social groupings within our customer base.

We are a network company and a small one at that, we need someone bigger to bring us the content. That means the content won't be exclusive so we have to add value to it another way. Hence the EPG and social network mashup.

That means things like the ability to recommend a programme to your circle of friends and comment on what you have seen, perhaps with an SMS gateway tacked on for alerts. When you turn on your EPG you see the linear TV option and the timeshift scroll back for the mainstream channels plus a Friends Recommend Channel.

We also have the Leeds Community Channel which will be developed before our IPTV service, but which needs evolve onto the TV when IPTV does arrive. The Community Channel is where local interest groupings (schools, community education, sports teams etc) can post virtual private videos to their members - much like the Iliad offer. All this is built on top of a core of content based on today's free local press.

We are already lobbying to force the publicly funded BBC content to be made available via public API so that anyone with a delivery solution can use it to deliver BBC content. The others are different because they are commercial entities, so why will ITV, C4, Five and Sky let us carry their stuff, sometimes in direct competition with their offerings?

Money. Pure and simple. They can get more from our subscribers if they deliver content via our network than they can via other means.

How? Because we know the customer's postcode and we can deliver that when we place the request for content. We also deliver the ip address of course, but they would get that anyway. With the postcode, they can then use Geo Mapping databases to paint a very good picture of who the consumer is, so they can use a) demographic and b) personalised advertising. They can't get this postcode without the ISP.

We could also consider sharing any special interest profiles that the user may create on our social network but this raises some ethical issues I suspect, not to mention the technical challenges.

But all of this needs to be pulled together: content, advertisers, client software, DRM and CDN. We are looking for one party to bring this to us. LUI's plan is to work with them and vice versa to prototype the future of IPTV.

The prototype is based on Joost, or Babelgum or Veoh (we haven't stitched it all together yet, it's just a plan). Something that runs on either an AppleTV-like STB or on the TV itself. Their job is to aggregate the content and provide us with an efficient distribution using P2P and local caching. They also handle all the advertising including the targeting and pay us a revenue share.

In order for this to work, Joost (or whoever our chosen partner is) must bring a deal with the major broadcasters. Joost does the deals with the content owners for us because they can and we can't.

Our BBC, ITV, C4, Five and Sky content comes through the deals that Joost has with them. Joost can pay better ad revenue than the producer can get by themselves from broadcast because we give them the postcode. As a result, they can target ads much more effectively. We get a rev share because we are adding value to their proposition.

Furthermore, we are solving one of Joost's problems - the EPG and social networking, which are currently lacking in their product - and we are leaving them to concentrate on their role as the IP TV operating system. We carry Joost's traffic and help them develop their intelligent localised P2P routing.

We provide the EPG (or at least our software partner behind the photo blog / community web stuff do that for us) and that has a two way API into Joost (or whoever). The EPG is our value add, our brand, our directory of content and the portal through which users can get to the array of services that we offer. Of course, they can go onto the open internet but with our gateway offering them RSS-based access to the world, we reckon that we can hold a fair proportion of the screen-time on our own services. Which is great for our ad revenues.

Of course this is all made up. LUI doesn't exist and there are holes in the plan and some very rough edges. With any luck though, this might give you a few ideas...

Part 7, back on Telebusillis is going to look at Hardware, which Keith will publish later this week!

Labels: Babelgum, catch-up TV, IPTV advertising, ISP Products, Joost, LUI, next generation networks, timeshift TV, video on demand

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We are now onto part 4 in our little mini series. In part 3, Keith described our Technical Operations and Engineering set up. Seeing as we are making this up, I could ensure this is staffed with enough resources to enable me to develop what until now, has been a very meet-too product set.

LUI tries to be very simple for its customers. We don't differentiate on speed - we just give everyone as much capacity as their line can handle - and we bundle together all the components that we provide into one of two (soon to be three packages). We are planning a fourth bundle including IPTV for "early 2008" - which as you know is industry code for August.

So what we have at the moment (Bundle 1 and Bundle 2) are pretty basic. The bundles include components which I will describe below, but in essence, Bundle 1 is our basic internet access service, while bundle 2 includes our voice services alongside that connectivity.

Bundle 3 is where we are trying to stand out. It wraps in some basic social networking components because as a local ISP, with all the associated scale disadvantages that Keith talks about, we need to exploit what is otherwise a weakness. We are going to be pivoting our future development around this community philosophy.

Being small means we can be local and we can be a part of the community. Until we launched Bundle 3, that just meant that our customer normally had a friend of a friend working here - and most of our signups have been via our rewards scheme. Now we are going to try and exploit that local community feel that we have that our larger, national competitors cannot hope to match.

In fact, Bundle 3 in many ways replaces Bundle 2. Bundle 3 customers must have the voice services and they don't have to pay any extra to get Bundle 3 in place of Bundle 2 because we make our money in other ways. Bundle 3 is where we start to make money from revenue share and advertising deals, which although they won't allow us to offer a free access product for the forseeable future, certainly looks necessary to mitigate the scale disadvantages we face.

The added components in Bundle 3 give us something "rich" to give away for free to encourage people to take up our boring old voice products. In summary the Bundles consist of the following components, which are defined in detail below:

Bundle 1 = components 1 + 2 + 4
Bundle 2 = components 1 + 2 + 3 + 4
Bundle 3 = components 1 + 2 + 3 + 4 + 5

Bundle 3 will also include components 6 or 7 (depending on customer niche) and bundle 8 when these components are ready. Our IPTV Bundle 4 is still in the planning stages and will be the subject of article 6, back here on ipdev.net, next week.

Unconstrained by the dramas involved in actually delivering all this, we can be highly idealistic in our product set. Having been there on the inside doing product development, you don't know how good it feels knowing that all the resources you need will be there at the meetings and will deliver on their commitments ;-)

Component 1 - Secure, Managed Internet Access
LUI is an internet access provider. Without that element of its product the service is nothing, so we have to get that right. Getting it right means no hidden charges or reduced quality if the customer actually uses the connection. We don't want to stop that because it is the future, so there are no caps, fair use policies or traffic management.

Getting it right also means that our services get delivered to customers through a managed gateway router. In theory, we hand off to the customer via eithernet or wifi, although of course things are never as simple as that - we know that you often need to help customers connect their equipment to the network if they are ever to use either the equipment or the network.

That managed router that we ship to the customer site provides full wireless, firewall and parental control functionality which we manage for them based on templates in our configuration database. The customer thinks that they are getting a specialised service because it is managed but in fact they are getting the same as everyone else. It's an old trick that has worked in the business market for years now and consumers are ready for it. Plus TR069 has made it all affordable to implement.

Component 2 - Content Filtering
There is a lot of bad stuff on the internet. Rather than hiding from that fact and hoping that the mud doesn't stick when politicians raise the subject, LUI is being proactive. We automatically block the IWF's watch list.

We are not judge and jury, but we accept our role policing the "rules" laid out by those in authority because to not do so would destroy our ethical, community based business philosophy. This is over and above a strong adherence to industry standard "notice and takedown" procedures. This means that when content deemed illegal by the authorities and residing on our network is notified to us, we take it down or block it immediately.

There is also a lot of stuff that although not illegal, many would prefer to avoid. For them we offer a service on the managed gateway router that filters content as determined by the customer's profile settings. Our customers have found this to be a better way of dealing with the problem than client software based services as the main offenders are teenagers with far more technical ability to bypass controls than most parents have to implement them.

All the parent needs to do is call us and we will (upon verification of their identity) implement controls on the router for them that their not-so-angelic offspring cannot touch. We also offer browser plugins for younger internet users and training materials for parents that create age-appropriate walled gardens for them to use safely.

Component 3 - Voice
Because we offer internet access, we decided a while back to bundle CPS voice and in 2006 also added Line Rental as an option for customers taking broadband. That was very successful on the revenue front, but caused us no end of headaches on the cost side of the equation especially with regard to Billing something that we never had a problem with before as our data bundles were simple fixed monthly prices.

When we unbundled, we were forced to keep the voice on CPS and use Shared MPF instead of full unbundling because we did not want to deal with rolling out a softswitch at the same time as everything else.

Keith is going to go into much more detail on the voice network and its commercials in part 5 back on Telebusillis...

Component 4 - Core Second Level Services
No self respecting ISP goes to market without the basic second level services: mail and web space. Rather than build these from scratch, we chose to outsource these from day 1 of our existence, which has given us a huge boost in terms of ever more advanced features coming out in quarterly releases from our supplier. These started off with basic AS/AV facilities but quickly grew with the addition of web mail, SMS alerts and more recently hosted exchange.

Where the internally developed versions of our competitors may have been easier to get up and running (and no doubt are much cheaper to run), our managed mail service has been getting better and better while theirs looks ever more tired.

The same is true on the web space side. That too was outsourced which meant that our customers now have had ever-growing space allowances and the ability to purchase and simply integrate domain names with their FTP space. Where some of our competitors are stuck in time, our outsource partners are helping us to develop a range of Web 2.0 services for our customers. If we'd had to develop all this internally, it would never have reached the top of the priority list and we would be stuck in the 1990s.

Component 5 - Web 2.0 Photo Services
We launched this not long ago. Well... to be fair, we "announced the intention to launch" these not long ago, but that seems to be the way the game is played. The city certainly liked it anyway, but then they don't have time to figure out that actually what we said is that we are taking pre-registrations for the next wave of products. They will surely ask how we are doing next time, but we can always give them a "too soon to tell" response if we aren't quite there yet. The Chairman was happy anyway, so that's all that counts.

Anyway, what we announced was that we were going to bundle in a Photo Blogging upgrade that our hosting partner is developing. The Photo Blog comes with a full online backup solution that will allow our customers the peace of mind that their treasured pictures are safe from the dreaded PC crash. They can also create public and virtual private albums allowing them to share their snaps with others.

One of the most exciting elements of this component is that our partners have bundled in Microsoft's Photosyth application into their service. This means that our customers public photos will be stitched together to build a tapestry of Leeds that will grow as more and more photos are posted. We think that this will really encourage our users to post their shots of Leeds onto our service and get them coming back for more, as the community builds a 21st century photographic record of the city in our time.

Another neat extra feature around the Photo Blog is the Photo Printing service. Again, our partner is doing this for us but we are set to get a 25% cut of any printing fees that they charge to our users and it will all be billed through our systems boosting total revenue growth numbers which should be nice.

Component 6 - Web 2.0 Social Networking Services (Locals)
Here we plan a big push in 2008. We are preparing to launch a set of partner delivered services that build upon the local communities in our catchment.

For Leeds residents we offer a set of social networking services, on the Leeds Community Channel. We are partnering with local media to deliver news, sport and current affairs bulletins that users can take part in to through the next generation of the Photo Blogging service, due out in Q2 2008. The local media is embracing user generated content and mashing itself up with local community and social services to provide a wide array of localised information and entertainment for Leeds residents.

Leeds businesses will be able to target their services at the Leeds Community Channel through BT Tradespace. Here, consumers will be able to find merchants, tradesmen or special interest groups that are local to them, visit their blog, read reviews by other customers and find recommended suppliers.

We considered launching our own copy-cat service in place of BT's Tradespace, but realised that we would be diluting our marketing by addressing consumers and businesses. Furthermore, businesses have requirements that could quickly escalate beyond what we are able to provide on a production basis.

All this is ad-funded and LUI is set to receive a 15% share of ad revenues on the community channels whether these ads are placed via the traditional media, via online agencies or through Tradespace. This is all gravy for us as all we need to do is provide access to our customer's internet usage data to allow advertisers to build and target specific profiles that improve their click through rates. Our privacy policy says we can, unless the customer checks the box when they sign up and agrees to pay higher access charges instead.

Component 7 - Web 2.0 Social Networking Services (Students)
For university students, we have struck a deal with Facebook to create every subscriber to the student package an account on that network. Facebook liked the way that we were able to bulk pre-provision the sign up and initial data entry of the customer's basic information (name, address, email, student ID etc) from our billing records.

We are working with the Universities in Leeds to align with their social and sporting groups, which they love because provides each interest group with their own site for their members. In exchange for all this free stuff that the Student Union gets, we get a very high profile during freshers week and mitigation against payment default by SU members. We are planning a beta launch of this when term starts in September for a small number of computer oriented societies - let's see how this goes...

Of course, we appreciate that these students are transient, so we have had to think hard about contracts, payment terms and guarantees. Most of them have 12 month lets on their houses or residencies which we are aligning with by working with the letting agents. In many cases, the default is that the rented property already has our service installed and the agents actually collect the money on our behalf as part of the rental fees. Every time a new resident moves in, the agent notifies us and they get paid a commission.

For the individuals themselves, their facebook profile needs to be detachable from our service when the individuals move onwards and upwards and leave Leeds at the end of their studies. We are laughing however, having agreed a 5% share of ad revenues, not just in year 1, but as long as the user has the facebook account that we created for them.

Component 8 - User Generated Video
We are going to keep this discrete from Video on Demand or IPTV. The difference being mainly that User Generated Video runs on a flash enabled web browser, while IPTV runs on the family room television set. VoD sits somewhere in the middle across both PC and TV platforms as a jack of all trades.

Once we have the Photo Blog services established we will build around that Video Blogging capabilities. This is likely to take us in two directions - mobile phone footage and video camera productions.

Mobile phone footage is a simple step up from the Photo Blog, quick and easy to post and share. This is great for contributions to news and sport media as well as within closed user groups. We should have this up at the same time as the Social Network upgrades in Q2 2008.

Video Camera Productions are much more complex as they require significant editing and we are looking for tools to help our customers process and create professional looking media and integrating that with the network and the private sharing facilities. We are preparing an RFP from various industry leaders to start the development of this, although it means that we may not go to market until the end of 2008 or even the beginning of 2009.

We strongly believe that there is a future here to be considered. Many people make film of their children that they would like to share with relatives but would be terrified of falling into the wrong hands. Our service will implement digital fingerprints onto user generated media so that only people that the user says can view their films, can see what they have produced.

On the other hand, these films may offer an alternative to mainstream media. DIY Productions Ltd might have a talent, but no route to market. We will provide one because they can upload their work for viewing on an unrestricted basis, potentially supported by advertising that we broker for them.

In order to prevent this sharing capability being abused for copyright infringement, the service will build in copyright detection software. We have to do this or we are toast...

Component 9 - IPTV
Don't look for this on the web site today. This is another project that won't be available, even on private beta until 2009, but IPTV offers us a huge opportunity. We are going to be well placed to promote, sell and install (remotely) the glue that holds the internet and the TV together: the IPTV network operating system and the set top box.

IPTV is also a major threat to us from a networking perspective because if we don't do it we won't be able to control traffic costs, so we are prioritising this for two reasons: to add value and to mitigate costs. Right now we are evaluating the best way forward. Part 6 of the series, which will be back here, will look at our considerations in this area.

Labels: ISP Products, LUI, Photosynth, targeted ads

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If you haven't already done so, read Keith McMahon's post first, or nothing that follows will make sense!

So here we are, we have a business plan to take over Leeds (or at least 16% of it) with our new LUI offering. What is going to be different about it? For a start, we are not going to use traffic management, caps or fair use policies. If we sell our customer a 20M service, they should be able to get 20M.

You can tell we're making this up, can't you...

We now have gigabit links into each exchange and we have migrated our customers across. It took a year and we lost a few percent market share in the process because of downtime issues.

We blamed BT for most of these customers and fortunately most customers believed us. If we were honest though, we would have to say that a lot of the problems were caused on our side by the size of the task, which was much bigger than we expected and just didn't have enough project management and technical support staff to deal with the enormity of it all. Now that we are up and running, we hope to quickly make back what we lost because our service, now that it is stable, will be first rate.

Without a base to migrate across, the costs would have killed us. Why? Because before we unbundled we had a much greater degree of granularity to our costbase - now, in addition to the huge steps in capital that you have all heard about, we also have huge steps in operating cost. This only made sense because we had well over a thousand customers on each exchange...

In fact, we would be paying less today if we'd taken LES 100 circuits (or 2 x LES 100 circuits in 6 cases) because bandwidth per user has not reached the 75kbps tipping point on a customer base our size that would make it more effective to go with gigabit backhaul yet.

This is the part that a lot of commentators find hard to understand, and even harder to simplify into a soundbyte - with fatter backhaul circuits comes a lower cost per bit, but this has to be counter-balanced by a much lower utilisation factor.

The fill factor depends on the user numbers, which vary wildly by ISP and by exchange and the costs depend on the distance from the exchange to your core network, which also varies wildly by ISP and by exchange. You have to make a lot of assumptions to arrive at a soundbyte which is why they are so easy to pick apart.

The typical modus operandi for an operator is to make aggressive assumptions that give great fill factors at fantastic price points, only to find after the capex is spent, that the amount of money a customer is willing to spend increases by very little (flat revenue), although their expectations are of much higher speeds.

Unbundling is another example of capital expenditure largely justified by a cost-savings business case. The necessary evil of spending more to keep the same recurring revenue coming in is a cycle in telecoms. It starts with a regulatory shift that opens new opportunities, then companies pile in with forward pricing to exploit the new capability only to find everyone else doing the same. The floor falls out of the market and the price war takes everyone back to where they started only with a big financing cost and a capital asset that offers no differential advantage.

LUI is being realistic, we have unbundled not because we expect margins to improve. We have unbundled because were in the market already and we needed to lower the cost per bit so that the cost of servicing a flat revenue profile did not escalate beyond our means as traffic grows. We are going to have to make our margins some way other than by selling capacity, that much we know.

Even with this negativity in the background, it was a slam dunk choosing the new BNS product from BT. Not because it offered us better costs today though. The reason was because we knew we are going to need to capacity tomorrow and beyond and BNS gives us a better cost that a LES/BES or a similar service from NTL, Fibernet, C&W or anyone else.

We are under no illusions, video is being consumed online in increasing volumes. Data from Nielsen/NetRatings shows that there are now nearly 140m viewers of online video, up from just under 60m a year ago. YouTube has managed to grow its share of the market (37% up from 33%) in spite of advances by Yahoo! (11% up from 5%) and AOL (11% share in 2007).

All this will quickly push our capacity requirements skywards and for this reason alone, we need to be prepared. With our network in place, everything between here and about 300kbps per user is effectively free to us as we are just filling up the capacity we have just installed. This is why we are not bothered by customers using line rate - we have the bandwidth, so they might as well use it.

Where we need to be concerned is what happens when that 300kbps tipping point arrives. That sounds like a lot, but it works out as around 25GB during peak hours per user per month. Add in the off peak utilisation and you are probably looking at around 40GB per user per month total. We'd be happy for this 40GB to go up to 50GB or even 60GB as long as it doesn't affect the 25GB during our busy hours. For this reason we are looking at ways to incentivize overnight usage.

The 300kbps tipping point means a second wave of gigabit circuits and probably beyond that when we reach 600kbps we are looking for 10 gigabit links. I see that Keith has amortised the costs over a 5 year contract, which is probably what most commercial entities would do as it delivers the lowest capex cost (because of discounts) as well as a lower amortised cost (for obvious reasons).

My preference would have been to go for the 3 year contract and amortisation period because personally, I would expect the lifetime of these assets to be something less than 5 years. What lease contracts did you take out five years ago and are you still using whatever it is that you acquired? Or, are the last couple of years sitting on your books not delivering value (or worse, already written off)?

More from Keith shortly...

Labels: BT, LUI, next generation networks

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