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Jeremy Penston

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Monday, 22 October 2007

The Two Headed Beast

It is strange to see an industry worth $1.3 trillion a year feeling powerless. Perhaps Canadians can understand it - they have a GDP of $1.3 trillion too - but the powerlessness in telecoms doesn't come from having a behemoth on the doorstep. It appears to me that telecoms operators are more like heroin addicts, powerless to prevent their dealer being sent down by the authorities who have finally caught up with them.

The drug is recurring subscription and minutes revenue. I would say that the industry has grown fat on it over the last few decades, but that would be suggesting that the income had been reinvested to bulk up the body of assets that they own. While some may be able to live off their reserves during the approaching famine, many will not - in particular new entrants - who have seen their share of the income passed upstream to wholesale providers and downstream to customers in the form of lower prices.

Taking from Both Sides
The need to create a two sided business model was one of the key messages from Telco 2.0 last week. Each side - consumers and business partners - must pay some because neither party is going to contribute the whole. Sounds good, but the practicality of the theory depends greatly on where you start.

Fixed and Mobile are different. They are very, very, very different. This was another of my takeaways from last week. For all the talk of convergence, actually what we may now be seeing are two rapidly diverging markets.

Fixed Operators - Out of Control
Fixed operators have very little control over what runs over their networks and that gives them very little leverage with business partners as they seek to develop that side of their business model. They are providing the bit-pipe commodity, which is fine for the internet evangelists, but terrible for the shareholders.

Consumers cannot differentiate one branded bit-pipe reseller from another, so the commodities are locked in a price war leading to MAD. The only winner may be the structurally separated monopoly wholesaler for whom the infrastructure guarantees a 10% or so ROI.

Where there is infrastructure competition, there is oversupply, and that is now being exploited. David Goldie of the CPW talked proudly of having built his NGN for just £200m, comparing it to BTs 21CN investment in the billions. Indeed, the CPW and Free in France have clearly made the investments of others work to their advantage, buying unused dark fibre or core network routes and leasing backhaul circuits to exchanges.

It is worth considering how little actual value this adds though - this is not infrastructure competition. It is buying distressed assets that has been built by over optimistic competitors. These like the CPW who buy are the winners of infrastructure competition, not the ones like BT or Virgin Media who are taking the risk.

But, for all CPW success, they are vulnerable to the next wave of oversupply. Having led the market lower and strategically decided to avoid adding value (it is an option...), they might find it tricky should someone else steal their clothes and take the lead on price. Orange indeed may have to, because their Freeserve market leading legacy has worn away through confusing rebrandings and over-complicated service wraps. What would CPW do if you got free broadband and voice with your mobile contract...? Just a thought.

I had to laugh when Dave Burnstein talked of how to make the open network model work. It begins with using distressed assets and ends with government money as far as I could tell. While it is good to hear controversial opinions like this aired, I had more sympathy with Openreach's Steve Robertson who argued that the case for fibre in the US is made by allowing telcos to monopolise the whole value chain - somewhere we don't want to go in Europe.

Mobile Operators - Quite the Opposite...
On the other hand, mobile operators have it all. They have an oligopoly, sympathy from the regulators (guilty at the 3G taxes), pricing power, huge cashflows and a valuable product (in the consumer's eyes). In one word, they have control.

Furthermore, their customers expect walled gardens. Mobile network neutrality? Is that perhaps the first time anyone uttered those words? But think for a minute, why is that a strange concept whereas fixed network neutrality is a religion for some?

The upshot is that mobos can evolve a two sided business model because on the consumer side, there is a lot of control and little in the way of choice, while on the application side there is control and... yes, that's right... little in the way of choice. Something that cannot be said of fixed networks.

There were regular pleas last week for mobile to go the way of fixed operators. The reason the mobile internet is so crap is because the networks are closed to innovative applications going over the top.

Those in the mobile industry delighted in this - why do Facebook, Bebo et al do deals with mobile operators? Because they have to to deliver a decent service. Why don't they do deals with ISPs? Because they don't have to. Who makes money and who doesn't? You don't need to know a lot about telecoms to answer that one...

Value in a market is usually defined by its desirability combined with its scarcity. There is scarcity on the mobile side, there is abundance on the fixed alternative. The scarcity comes back to that one word - control. Why don't they open up their networks? Go figure.

Two Very Different Ways Forward
There are so many differences emerging between fixed and mobile that they might have to start splitting conferences like Telco 2.0 up into one where the addicts can wallow in their own pit of despair and another where they can scheme and plan how to combine to squeeze control back from upstarts like Google. Divergence for me really was that clear.

The two sided business model has a lot of promise for the mobile guys because the hydra is under control - tamed by it's master's control over its environment. For fixed operators, it might just be back to chasing the dragon.

Labels: Telco 2.0

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# posted by Jeremy Penston @ 10/22/2007 02:40:00 PM 0 Comments

Thursday, 11 October 2007

The Big Stick

In my final post ahead of Telco 2.0 next week, I would like to outline the key questions that I will be looking for answers to next week.

It is important for me to stress up front that the opinions expressed in this and all other articles on this blog (excluding the comments) are my own and do not in any way express the views of Telco 2.0 or STL Partners either directly or by association.

The background to this article can be found in two previous articles. The first piece looked sceptically at whether platforms are really in the telco domain when internet applications like Facebook, Joost and others are able to deliver much of the value with one global development. The second looked more optimistically at how a telco platform may be able to bring the safety and cost effectiveness which those applications need but cannot replicate.

Why would a consumer choose Telco 2 and not Telco 1?
Telco 1 is (for me) characterised by price competition and attempts to somehow project the image of superior quality. The problems with both are fairly clear - price competition is a race to the bottom, while quality of service is highly subjective. Anyone can claim to be cheaper and better - is your service even cheaper and even better...? Neither are sustainable.

A platform based Telco 2 has to put extra resources into exposing that platform to developers and developers need to jump through many hundreds of hoops to reach the same global audience. What benefit is that going to deliver to the developer and to Telco 2's customers?

It is stating the bleedin' obvious, but Telco 2 has to offer their suppliers and their customers something that they can't get from a Telco 1. That something, or that collection of somethings, has to be big and it has to be tangible to get developers to jump through those hoops and to get customers to think about something other than price.

The result is consolidation, meaning that there are fewer Telco 2s with more customers, more pricing power and hence more revenue each than there are Telco 1s. Why, because customers have chosen to drop Telco 1 in favour of those that have become Telco 2. In the end, only the customer's choice can determine the success of the Telco 2 platform, but that choice may be easier if there are no alternatives...

What is the value of the platform?
What can a telco platform based application do that cannot be achieved without the platform? What does the customer get from choosing a Telco 2 based service?

In the second piece I suggested ways in which applications can effectively be blocked from Telco 1 customers. This falls into two camps: applications which Telco 1 blocks because it cannot afford to deliver (like HD video perhaps?), and applications which block themselves (or pieces of themselves) from reaching Telco 1 customers.

The first of these is relatively simple to understand because it falls into something that is close to core telco business today - making networks more efficient. I won't labour that point because I have discussed it elsewhere ad-nauseum.

The Locked Gate
The more interesting area that I want to get you to think about is the second. Why would an application developer significantly disadvantage its customers that use a Telco 1 network?

Of course, Telco 2 throwing money at them for exclusivity is one way, but I suspect that this would not work with the bigger and better services that consumers are most interested in. Perhaps this Telco 2 ends up with a suite of niche aps but it will be a hard sell to make them into something that customers pay more for. Am I wrong? If I am, what is that suite and what is the differential advantage and price premium that can be extracted?

Giving the Application the Keys to the Gate
Something far more sustainable for the Telco 2, might be to have the application block itself. Why would a developer do this? I suggest that one reason may be to protect itself from legal issues. This may be the verification of age and/or identity that I mentioned in an earlier piece, another may be meet interception and other policing obligations that the law may impose now and in the future.

In fact, anything that you do in real life that requires an ID card might only be possible online if the consumer is using an application based on a Telco 2 platform that helps validate the user's identity. What are these? Banking may be one, pornography another. These two ends of the spectrum highlight the range that this may include.

But, I hear you cry, you can already bank or watch porn online today! Don't worry, I know... I will come back to this point at the end of the piece. Keep reading and it may start to make sense.

Eliminating Online Credit Card Fraud
A related area is payment fraud. If by using a Telco 2 platform, a service like WorldPay (or the credit cards that are used on such a service) can be insulated against fraud, significant sums might be saved. Hey, if WorldPay detects an attempt to pay with a stolen card, they could alert the Telco 2 who alerts the police immediately, giving precise location details...

If banks can eliminate this fraud exposure, might they offer a cheaper service to a Telco 2's customers? Might they even decline to service Telco 1's customers, perhaps after a tipping point has been reached?

Ok, so the above deals with mitigating the developer's legal and financial exposure and catching crooks, but there are upsides too. A Telco 2 platform may also be integral in delivering what has been termed the Holy Grail of advertising - personalisation. I wrote about this at length a while back, so I won't repeat that here but this is a different example of how identity, geography and location can deliver huge financial upsides to the applications.

Do Users Have to be Protected from Themselves?
Since I wrote that piece though, I have been made aware of many ways in which users have already given this data away. Some have freely and openly shared it with aps like Facebook, others have sold it for a song (or worse) while in other cases this has been quietly and much more secretively compiled by stitching together services like search, news readers and payment gateways.

A huge privacy issue facing the internet is "how I can make sure that data I provide today doesn't come back to haunt me in 10 years time". If I was 18 now and using Facebook to boast of my drunken exploits and womanising prowess, would I want my wife or my future employer reading about it, seeing pictures and watching videos of it all ten years later? Umm... no.

Would I want my kids reading about it all 25 years on? Photos of me at 18 are safely locked away (apart from the of me with back-combed hair that my mother-in-law is holding hostage): "what goes on tour, stays on tour" we used to say, but Facebook didn't exist when I was 18 - thank goodness.

These days, some muppet with a keyboard and a camera phone could seriously damage either their own (or worse someone else's) future. Can a Telco 2 platform help correct the mistakes we made when we were young? The demand for such a service may be practically infinite.

Growing Up
I suspect that at some point in the future, the data collection and storage on social utilities, search engines and payment gateways may come under intense legal scrutiny. Can this data, collected once, be used for eternity? Can it be used without explicit consent given at the time of use, rather that at the time of collection? I doubt it, but this has never been properly tested.

Can a Telco 2's platform help a) keep this data up to date, b) obtain consent at the time of use and c) create a chinese wall between your identity and the use of your identity? Yes is probably the answer, but how? That might take a little more thought.

Can a Telco 2 platform also help expand notice and takedown beyond the current copyright boundaries and into the social sphere? A key part of making such a process work would be clear identification of the user making the request, and validation of their right to request that content relating to them be removed. And of course, making the whole thing slick.

While the site in question may also have to act, such a validated request may shortcut much of the process and perhaps even remove the need for lawyers. Could the Telco 2 take responsibility for blocking content that has been requested removed but is not?

Telco 2 as The Big Brother
No doubt, there will be many readers hearing alarming implications for privacy. Indeed, the potential for abuse is clearly evident, but telcos are not applications - they have their assets fixed in place and cannot move their whole operation to escape legal obligations as an application conceivably could.

The Chinese Walls are vital. For sure, the Telco 2 holds a huge amount of customer data, but they do not benefit from its use so there is no incentive for its abuse. Much as is the case with old world telephony, the Telco 1 knows who you have called but they have no reason to use that for their own gain.

Locking the Gate
I said I would come back to this point and I have left it until last because it is unquestionnably the most difficult to conceive. What does the Telco 2 need to do to get the developers to play ball? It certainly won't be easy, but at its heart, the above relies on the Telco 2 making it impossible for the application to deliver its service without hooking into the Telco 2 platform.

I suggest that this is a three stage process.

The first stage is to develop the data sharing interfaces and to make them available voluntarily. This takes technical skills and is something that actually is not that hard for the Telco 1 to do. Telco 1 has, in all likelihood, not done so because they cannot see past this stage.

Stage 2 is to show the people with the real power - governments, lawyers and bankers - the dangers of the massively open model (child abuse, law breaking and fraud risks respectively) and how Telco 2 has the solution. Once there is a platform with the answers, some solutions might be legislated directly, others might arise because of the threat of legal action (getting jailed or getting sued) and others because liability insurance premiums skyrocket.

By the end of stage 2, it is likely that the biggest and the best aps are only available from Telco 2, so the final stage is easy. "Come and get it, Mr. Customer", Telco 1 cannot deliver.

Summary
I simply don't believe that a Telco 2 platform brings enough as a standalone entity, and there are potentially too many of them with too few customers each for the big global aps to work with. There has to be a big stick if the ap refuses the juicy carrot.

Fortunately, telcos are well practised at playing complicated games of legal chess because of all the regulation they have worked with for the past 25 years or so. There are some who can take your watch while shaking your hand!

The end result though is a place where I think we all want to be. Where the internet is a safer place for children and adults alike, where you have control over what people know about you, where you have control over how they use what they know about you, where you can remove content that you regret producing or that you regret someone else producing about you.

Some may find the approach a little underhand... But is there an alternative? If you skip stage 2, why would a developer jump through the hoops? If developers don't differentiate between Telco 1 and Telco 2, there will be no features to promote in stage 3, so your stage 1 investment would have been wasted. Does anyone have a better suggestion?

Labels: Telco 2.0

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# posted by Jeremy Penston @ 10/11/2007 01:20:00 PM 4 Comments

Friday, 5 October 2007

Cheaper, Safer - not Richer

Am I looking in the wrong place? I wrote earlier this week that although telco platforms might make 3rd party services richer, there is a problem because every feature that a telco might enable is already being copied by application platforms that run over the top. On reflection, I wonder if what telcos really bring to the party is not actually richer functionality but is in fact cheaper and/or safer functionality.

The Telco Platform
The initial piece was a lead up to the Telco 2.0 conference on 16th - 18th October in London. Telco 2.0 is based around the principle of the telco as a platform and although the idea was well ahead of its time when it was conceived a few years back, much of that advantage has been lost as internet applications have evolved. Meanwhile, telcos have done what telcos do best - delayed.

As much as I agree with the ideals of connectivity being supported by a sustainable economic model, I can be practical verging on cynical sometimes. I have asked myself on numerous occasions what exactly telco platforms bring to the party? Why would an application developer want to wade through treacle to integrate their applications with one, let alone several hundred slightly different telco platforms?

Facebook didn't need to.

I just don't see any functionality gains that make it worthwhile for an application developer to go through this pain - go on, prove me wrong (you know you want to). The only reason for working with the telco would be to get around obstacles that might be in the way.

What might these obstacles be?
These obstacles fall into two camps: economic and ethical/legal. Economic obstacles are simple to understand - the application is too expensive (across the entire delivery chain) when delivered over an open network. What I have termed ethical/legal is much more complex but essentially can be boiled down to what is right or wrong and the obligation of the delivery chain to minimise the latter.

Economic Obstacles
IPTV has economic obstacles. It needs to work inside telco platforms because the cost of internet distribution is forcing telcos to impede the open network model through traffic shaping. A painful death is waiting for the telco that doesn't manage traffic or reduce the cost of delivery by integrating the application into its platform.

Such integration is a win/win - although for the application provider it might also look like blackmail. The telco wins because it can eliminate its transit, core network and big chunks of backhaul cost making the delivery cost effective and the service performance excellent. The IPTV application provider wins because it can deliver its service; should they try without working inside the telco platform, they will be on the last train to nowhere. The alternative is MAD.

But perhaps proper IPTV (as distinct from internet video) is a special economic case because the file sizes are so far in excess of what other applications generate? That might be the only example where there is an economic imperative for the telco to build obstacles to traffic delivery from the open network and where the threat of losing customers to other telcos using the open model can be ignored.

Ethical/Legal Obstacles
The internet's biggest strength (its openness) is also its biggest weakness. Whether we as industry insiders like it or not, there is a dark side to our creation that allows people to do unspeakable things because they can do so without being traced.

For many years, telcos have fine tuned a position which says that they are not the police and that they have no responsibility for the traffic carried on their network. For hosting companies with servers that store such data, this position has always been sailing close to the wind, but in most jurisdictions the principle that the ISPs responsibility ends with notice and takedown has been accepted. Again, this position is based on the principle that the bits and bytes are the customer's responsibility in the same way as the road network and the vehicle rental company are not responsible for truck bombs.

The problem is that once an application platform is provided that facilitates the building of networks whose purpose is evil, or where activities are only legal at a certain age limit, a far greater degree of responsibility is imposed on the platform provider. The obligation becomes proactive - instead of waiting for notification by the authorities before executing a takedown, the platform provider's responsibility also includes to police the use of its service.

I would liken running a platform to running a hardware store. In this case the owners have a responsibility to ensure that the sale of explosive chemicals is closely monitored and that their customers are of a certain age that legally allows them to buy certain products. If they do not make the necessary efforts to prevent such things, then they can be held liable if someone uses their products to build a truck bomb.

A real problem
Legitimate businesses like MySpace and Facebook face the biggest threats because their platforms are being used (by a minority) for evil and where another (much larger) set of content might be deemed to be inappropriate for minors. Om has written recently about how Facebook faces significant difficulties with law enforcement because their platform is being used in such a way. Let's be clear, it is not Facebook committing unspeakable crimes - they are not the ones doing the deeds - but they are held partially accountable because it is happening on their platform.

There is little policing and no audit trail for a platform sitting on the internet. The identity of the miscreant is hidden by the layers between the platform and the IP address allocation and there is no horizontal record of the user's activity. This can usually be patched together after the event, but this is shutting the door after the horse has bolted isn't it? Like having no coppers, just lawyers...

A real solution?
There is a liability because the application is providing a platform for the activity. I wonder if this is not a key area where the telco platform has a role to play? Without the telco's cooperation, the application provider has no clue whether John Smith really is who he says he is or whether he is a convicted paedophile using an assumed name.

Such a person may be allowed to walk the street, but may not be allowed within 250 yards of a school. Put that into an internet context he may be allowed to use the internet but he may not be allowed to use MySpace. But how on earth does MySpace know this? It may be that it needs to talk to the telco platform before allowing the user in.

Similarly, the telco platform could conceivably take responsibility for providing the digital proof of age card for the much less serious but much more common problem of under-age access to adult content. Parents can then be much more certain that their technically adept children are not going to be able to override their parental controls quite so easily.

What's in it for me?
What's in it for the application provider? This one is pretty simple - they get proof that they have made the necessary checks on their customers' right to use their service. With this should come immunity from liability when laws are broken, which should make sure that such a solution is popular among legitimate businesses.

What's in it for the telco? This might also be simple - if applications can remove legal liabilities by these checks, they may well quickly conclude that they can only work with providers who allow them to make such checks. If a telco doesn't provide the data, the customer is locked out.

Telcos are pretty good at record keeping - they have had to be throughout history because CDRs are a big part of their business. They know where a connection originates and who is using that connection. They bill the customer and already credit check - adding a proof of age and checking whether the user is a registered sex offender is not a big leap.

Privacy need not be an issue
What about privacy? It should be noted that such a model has a clear Chinese wall between the telco who has the data and the application who has the user. The only data that needs to be passed is two yes/no flags saying whether the user is allowed to access a given service. No names or otherwise need change hands unless the application also needs to positively identify, for example in a banking environment.

Summary
In the end this is just a couple of examples. But, it deals with real issues - a commercial one and one that every right minded person wants solved - and issues that can only be solved with links between various platforms.

There are many ways which I have not considered where the telco platform with its knowledge of exactly who and where the user is (as opposed to who and where they say they are) can be used to benefit the application and the industry as a whole. Until now I have been looking for new features or better features and I have ignored the much more basic elements - perhaps I have been looking in the wrong place? It may well be the boring stuff, the stuff that makes using an application cheaper and safer, where the telco platform is needed?

Labels: platforms, Telco 2.0

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# posted by Jeremy Penston @ 10/05/2007 10:56:00 AM 0 Comments

Tuesday, 2 October 2007

Platforms, Platforms Everywhere

With Telco 2.0 fast approaching, it seems appropriate to devote some space to the trend that is sweeping across the internet. Fair play to Simon Torrence, Martin Geddes and co, they have been working on this thesis for a few years now.

My summary of the Telco 2.0 Manifesto goes something like "Telcos need to open their platforms to 3rd party service providers by providing hooks that allow the services to be made richer".

The first problem for me is one of definitions. Richer... I used the word (the Telco 2.0 Manifesto does not, to be fair), but what on earth does it mean? Of course, we all understand "richer" in the Bill Gates sense, but in terms of applications being "richer"? It is important because if the aim is to deliver "richness", we should probably have a clear view of what we mean. Unless it is a cop out - a bit like "added value"? I'll leave that thought hanging.

While the above is my interpretation of the manifesto, this comes directly from it: "There are many “leaks” in the abstraction of Internet Protocol that the operator can exploit: network topology, geography, location, identity, relationships between edge nodes, distribution, billing, and so on. Every one of these gaps between theory and reality is a business opportunity."

These may be areas where the Telco has inherent advantages, but assuming that these advantages are everlasting is a mistake. Already, over the top applications are finding other ways to get the information they need: Facebook for example is an identity application that knows as much about you as you care to tell your closest friends. If you have ever used their checkout service or their autofill toolbar, Google knows your location.

Platforms Everywhere
Facebook, WordPress, Joost... all offer platforms, as do many, many other Web 2.0 companies. Platforms for what, exactly? In these three cases, I think we are clear (social interaction, blogging and IPTV respectively) but every day a new platform is announced. Google is a platform too, but defining it is somewhat more complex. Many of these new platforms are platforms on platforms.

Is this simply a game of Tetris? Are we are building layers where once one is complete, it disappears from our consciousness because we have to focus on the next brick falling from the sky? What about the gaps, where a new platform that comes along that relies on an old platform that is not quite complete (VoIP perhaps)?

What is a Platform Anyway?
Just for fun, I looked up the dictionary definition of platform. The first result is "a horizontal surface ... raised above the level of the surrounding area". The eighth is "a set of principles" and the ninth "a place for public discussion". The last in the list is "a scheme of religious principles or doctrines" - more food for thought.

The Telco is clearly a hardware platform, "a group of compatible computers that can run the same software", in this case IP. The problem is that this row of blocks has been complete for many years now, it is now invisible (until it breaks) and the product is clearly a commodity.

The new platforms are software platforms, "a major piece of software, [such] as an operating system, an operating environment, or a database, under which various smaller application programs can be designed to run". These new platforms are operating systems that run over the top of the telco hardware platform.

A Troubled Legacy
Telcos already have their own software platforms - in fact each one probably has many software platforms. These have been kept away from customers because that is the best way to hide the industry's dirty linen, but if the 1.0 Telco is to evolve beyond the basic commodity hardware platform, these software platforms need to be opened up.

But is it already too late? Have the new software platforms bypassed the need for the Telco's own software, or have they simply given up hope that something ubiquitous will ever exist? Even if it does come to pass, how is a ubiquitous Telco 2.0 platform going to retro-fit below the layers that have been built on top of the gaps? Tetris 1.0 vs Tetris 2.0...?

So what is it that Telco software platforms can offer that make Web 2.0 software application richer? What reason can the telecoms industry give developers to fight through the layers of history and start working backwards rather than forwards? Or, is the Telco platform like witchcraft, an outdated set of doctrines beyond which the world has evolved?

Labels: platforms, Telco 2.0

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# posted by Jeremy Penston @ 10/02/2007 12:00:00 PM 0 Comments