Labels: ASSIA, BT, IPSL, John Cioffi, John Papandriopoulos, Melbourne Ventures, next generation networks, Rim Semiconductor, VDSL

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One advantage of being your own boss is that you can tell granny how to suck eggs without getting the sack. So at the risk of teaching an old dog old tricks, today's article is going to go back to basics and draw a picture of a baseline network.

Under normal circumstances we might just draw a cloud in place of the detail below because the detail, like the network itself, is only relevant when there are problems that need to be understood. Once those problems are solved, we can all go back to drawing clouds.

The time to examine those problems is now. This week, Ofcom launched its Next Generation Access (NGA) consultation which appears to run alongside the efforts of the Broadband Stakeholder Group (BSG) activities and Stephen Timms (MP)'s efforts to convene a summit. Whether all these acronyms offer parallel efforts or something more in keeping with the market trend for convergence, we shall see.

While the focus is on the local loop and the peak capacity that can deliver, the situation is a lot more complex than simply opening the gates yet further.

Transition
We are in transition from dial up to "true broadband". In fact we may always be in transition because after true broadband we should probably expect the next next-generation lobby to be pushing for something that they might have to call "true true supersuperfast broadband, honest". Drawing lines in the sand though - at say 100Mbps - gives a target that helps us plan for the next stages in the evolution, but it is worthwhile noting that there will never be enough to satisfy the high end users.

We know that video streams are an elephant in the room, which some have estimated will account for 98% of internet traffic within two years. This is a serious problem so that means getting into more detail about the network and the factors that are creating the problems.


The first point to make is that for all the fuss about Fibre to the Home (FTTH), that is only one part of the jigsaw in delivering video to people's homes. The local loop is one of four major choke points on the access network side that need to be considered. Sitting alongside those access issues are considerations of how the internet routes packets and how and where those packets are stored.

In fact, for all the hype, it may be that FTTH is one of the least pressing of the issues that stand in the way of the internet's ability to deliver the larger and much more lumpy video traffic on the horizon. At some point, the last mile will again be the most significant bottleneck - as it was when all we had was dial up - but right now, how many people would be able to use a 100Mbps local loop if it magically turned up on their doorstep?

Would the architecture support it? Would there we enough capacity in the home and on the core network to use it? How many knock-on issues would we need to solve before we spend the money on fibre in the local loop? A chain is only as strong as its weakest link...

The Home Network (x, in the diagram above)
A good place to start: it is undoubtedly the most complex issue because of the anarchy that exists in this space. There is no control over end points and how they are attached to the network, or indeed which network they are attached to. Security? It is best not to ask - denial is a wonderful thing...

Consumers are truly left high and dry to build the wireless / ethernet / homeplug network for themselves. If they are really lucky, they can get a friend / son / daughter to do it for them.

This makes the introduction of new hardware and new services that would use the 100Mbps a significant challenge. The customer may not have a network, or it may be "a bit flaky" such that when they come home with shiny new CE equipment, they are disappointed (or worse) to find that it doesn't work. So they make a call to the ISP but after a long wait, they find that their "service" provider isn't there to help.

Do you phone a friend every time you want to install a new device in your home? How soon before your DIY network starts to creak and your friend's generosity starts to get seriously tested? If everyone suddenly had 100Mbps to the home today, very little of it would be usable because the capacity of the last yard is significantly below that. Before FTTH, we need a solution that simplifies the home network and extends management of that to a real "service provider".

The Local Loop (y)
No-one is happy with the current state of affairs. That is not to say that everyone agrees that access networks are too old and slow and are in dire need of an upgrade - LLU has yet to be fully exploited, so perhaps we should start getting the best out of that? There are two conflicting priorities that need to be managed: ultimate speed is one of them, but at least as important is ultimate reach.

Looking first at speed, there seems to be a clear assumption made by many that we need more than ADSL2+. This point is worth explaining because this is not about headline speeds: 24Mbps for all would be enough for a fair few years. But ADSL 2+, like ADSL 1 speeds degrade with distance, so only anything substantial can only be delivered in real time over relatively short distances.


This table is from the BSG report, Pipe Dreams. Links to articles covering that and other articles can be found on the Digital Divide section of this site.

In summary, only 30-40% of the population are close enough to their exchange to get 8Mbps or more on copper. You can get more on cable but cable also covers less than half the population, similarly concentrated into densely populated areas. For some therefore, there is a vibrant market and the local loop is no barrier at all. Certainly not one requiring life support from a quango or two.

The role of the quango should be to concern itself with the areas where the market does not have an answer. In the local loop, this includes a significant number where there are signs emerging that the market for connectivity beyond LLU will fail. This failure will occur because the market needs huge investments by Openreach to shorten the copper loops but for the monopoly it is hard to see any extra revenue to pay for the new investment.

So 60% of us might be stuck with the speed we have today - it doesn't matter whether we use ADSL1 or 2+, the result is the same because the line length is the problem, not the technology at the exchange. And because the copper replacement case is so weak, you might have to move to a new build estate to get fibre to your home...

BT IPStream and ADSL1 (1)
There are very clear signs here and now of market failure in the provision of basic broadband access. Fortunately this only impacts a very small minority who cannot get 512k or more - a rare enough occurrence that some even appear as "news" these days.

This market failure today is very small indeed, but there is the prospect of many more (perhaps 15-20% of the population) getting left behind in the rollout of LLU. Although there is no doubt that competition here has led to cheaper products for all, those price reductions came at the expense of the digitally divided for whom competition in the local loop is a double whammy.

Competition means that investment from all players, including BT, has focused on the denser locations where the business case is best. For most, that means higher speeds and lower prices but the money taken out of the value chain through price competition, is money that was once used to cross-subsidise services where the business case didn't make sense. For the minority on the other side of the divide, LLU enshrines a two tier system.

Two Tier Pricing
A two tier system means two tier pricing, but it is worthwhile understanding what that two tier system means. It does not mean people miss out on broadband: almost everyone can get affordable broadband connectivity if they want it - 99.x% have access to some form of broadband and prices are universally below £20.

Two tier pricing may mean that the basic product is available for free on LLU exchanges and for £10-£15 more on IPStream, but even that is not the problem. The problem of the two tier pricing system as it is evolving, is the impact that it is having on the affordability of broadband capacity once you have the basic connectivity.

This manifests itself as usage caps and fair use policies because broadband capacity (as distinct from broadband connectivity) is hundreds of times more expensive on IPStream than on LLU. For these consumers on the wrong side of the digital divide, competition in the market means that the cost of actually using the service is prohibitive.

Every action has an equal & opposite reaction
This two tier system is the direct product of "managed competition". IPStream's prices are maintained artificially high to allow room for competitors to build their own infrastructure at a cheaper rate than they can lease capacity from BT.

Solving the two tier pricing problem may distort the competition that has been so carefully created because it means BT selling IPStream at rates comparable to LLU. This would undoubtedly stop future LLU investments and throw into doubt the commercial viability of many existing deployments. It also requires that BT have an incentive to cut prices for the least profitable exchanges in an environment where there is no competitive pressure demanding that they do so.

There is a significant difference between now and 2004 when BT held back enabling the least profitable exchanges with ADSL1 because the promise of returns was non-existent. The difference is that now BT has to compete with LLU; in 2004 they were a monopoly and could cross-subsidise more effectively.

The key question that we need to be clear on is who are we trying to deliver fibre to? Is it the top x% where a little shove makes the business case work? Or are we going to let the market work on that while aligning regulation and politics to deal with the bottom y%?

Backhaul (z)
Backhaul is an issue that is best summarised quickly here. There are more details in a previous series of articles written by Keith McMahon and I a few months back.

Backhaul has been a severe inhibitor to the development of broadband in the UK for the past few years but it appears that BT have been quietly upgrading capacity of even some of the long tail of exchanges to fibre (I have heard anecdotes of exchanges on the 95th percentile being glassed up). This, combined with their new BNS product for LLU operators described by Keith in the above article means that we are much closer to removing capacity constraints in backhaul.

That is not to say that backhaul is universally cheap though, as the model is heavily distance dependent and profitability is reliant on customer density. The pricing scheme is built to deliver service to those with their own core networks close to the exchanges being unbundled. The model is designed to clearly benefit the decreasing number of larger players.

Backhaul competition exists but the BNS introduction certainly took the price floor down a few notches. Additionally, there is a subset of exchanges colocated with the core network itself but these have a much easier life because there, core networks are cheap and plentiful and the backhaul circuits are simply internal wiring.

Would backhaul survive an overnight upgrade of local loops to 100Mbps? For the vast majority of users, the answer would have to be yes but what would break would be the business model because backhaul pricing is based on today's usage and not what you would see with 100Mbps in the last mile.

Backhaul Pricing
This final point deserves explanation because the way that prices are set is a self fulfilling prophesy. In simple terms, there is a "budget" for backhaul - ISPs and even consumers buy as much as they can for that budget. They will expand their usage gradually to fill it and then throttle back use so that they fall within the budget, until the price falls and the cycle starts again.

Dropping prices means more capacity would be available within the budget, but it does not often lead to absolute gains in total revenue because people still spend the budget. Of course it is recurring revenue so you need to keep cutting prices to keep the business - most assets require between 3 (hardware), 5 (system) and 15 (infrastructure) years of use at a recurring fee to pay for itself.

The problem for those selling capacity is that when you drop the price, it takes time to recover the revenues you have given away in the reduction and even when you do, you often find yourself back to square 1 as the throttling caps the upside. So it makes most sense to hold tight and wait for someone else to make the first move.

This point is clearer working through an example... Say you have 100Mbps of used capacity at £5 per Mbps and are charging £10 per Mbps to your customers. Your total cost is £500, your revenue is £1,000. Say that you then upgrade that circuit to 1Gbps at £1.25 per Mbps (total cost £1,250).

At that point in time you are making a £250 loss - what do you do? If the market is saturated you face a problem because you somehow need to be able to get users to pay more than their budget (£1,000). Even if there is still some growth room from new users, do you hold on and sell slowly at £10 per Mbps? Cut the price by the same proportion as the cost to £2.50 per Mbps (total losses now £1,000 and a breakeven point of 5 times your existing sold capacity)? Or something in between? Does this change if I tell you that your competitor is selling at £4 per Mbps...? £3.95, perhaps?

The problem is that prices are increasingly lumpy with ever larger upgrade steps (100Mbps to 1Gbps is 10x as is the next step to 10Gbps). Such steps cause problems because available capacity increases far in excess of demand. Pricing on the basis of availability would leave the owner with pennies in comparison to pricing on the basis of usage, although the latter has the effect of stagnating growth.

Backhaul Competition
Extending the core networks to get increasing numbers of exchanges on-net is the only way to take the recurring cost off your books, if operators want to. Putting their own fibre into exchanges sounds attractive, but it is even more attractive to wait until someone else does and then needs to sell the new capacity. At that point the wholesale customer can start to drive the price down aggressively at the expense of the facilities-based carriers who undercut each other progressively downwards.

There is an incentive problem for operators who may be considering investing in their own backhaul builds. They are better off waiting for some other idiot to make the first move...

If competition is going to stretch into the provision of local loops, it must first address the much simpler issue of backhaul competition. It is simpler because it is a fraction of the cost, but the issues are the same: protection of existing assets, build cost, site access, asset sharing, equivalence, price fixing, price regulation, period of regulation, certainty, etc. Perhaps it is a safer place to experiment with various solutions?

Content Issues
In simple terms, hosting content on your own servers is cheapest, next comes content on peer networks that can be reached through internet exchange points while Transit is the most expensive.

Transit originated as a way to get access to US content, but more and more of the big US properties are now hosted on caches that can be reached through in country peering (from my ISP, you can get to google.com through LINX). Transit still plays a big part because it is the only way to reach everything else (youtube.com goes through transit). The difference between transit and peering is that you can't transit peer networks as a general rule.

Transit networks themselves host a lot of content but their value primarily lies in that you can go over one of these networks to reach something the other side. So instead of maintaining thousands of smaller circuits with everyone else, Transit takes care of that in one interface.

How would content hosting be impacted by 100Mbps in the last mile? It might be ugly for a while as the shock of an overnight upgrade kicks in, but as we are unlikely to wake up tomorrow and find the tooth fairy has given us all fibre, we have some time to consider the impact on the electrical grid.

Space is not a problem: in the late 1990s data centres the size of football pitches were constructed which are still being filled now. Network connections are not the problem as most are on multiple fibre rings.

Power on the other hand is a real concern, particularly given climate concerns and the ever increasing cost of energy. We really do not understand the power consumption increases driven by fibre to the home - this cannot be ignored as delivering new electrical capacity may be even more problematic than laying the fibre.

Bigger Lumps of Data
Video is not necessarily going to be the most popular internet application but it doesn't have to be to cause the predicted impact. It is not where people spend the most time that necessarily drives the traffic: a second of HD video is 65 times as much data as a second of high quality music. Put another way, 1 hour of video is 65 hours of music or 315,000 page views on google.com...

For video files of that size, there are storage implications, but storage capacity is far more advanced than network capacity so it becomes more a question of where do you keep it to minimise the distance travelled and subsequently the cost you incur. If you can control it there are suggestions of charges for premium delivery to help monetise the downstream access network assets.

Whoa! Network Neutrality alert - but looking at how this is being played out, there is a question whether the content applications will cooperate to allow the ISP to exert such control. P2P is an example of how content companies are trying to work their way over the top of ISP platforms.

P2P vs Client Server
The concern with video applications is understanding the direction the market will develop. Will it be the wild west all over again with P2P data everywhere (forcing much of traffic onto transit networks) or will the video market evolve to work with the networks (much of the content locally hosted). At stake is the bill that ISPs pay transit providers for global access.

The choice of application is as much political as it is technical. If P2P wins, it will be increasingly hard for ISPs to do anything about monetising the increasing volumes of content but it may deliver an inferior user experience - something the ISPs can comfort themselves with. ISPs would be much happier with client server as that is something their networks have been built around and something they can control the quality and cost of.

Fibre and 100Mbps access certainly plays into the P2P corner as it blows away one of the fundamental limits of P2P - upstream bandwidth. In a DSL environment there is only the capacity to create perhaps a 10th of the capacity there is the potential to consume. In a fibre environment, it can all be P2P.

I believe that we need to look at how and where the networks route P2P and move routing closer to the edge to reduce tromboning. This is because applications would perform much better and network demands may well be lower, even allowing for the additional Layer 3 technical and operational overhead. Geo-aware P2P might work for everybody, but that is a story I have written up before.

Busy Hour Planning
There is a huge difference between how computers are used on the internet and how TVs are used. Watching television is much more heavily concentrated: peak audience (of all channels) is around 2.8 times the average audience over a 24 hour period, whereas for web surfing this is nearer 2.1. P2P actually generated very good peak load efficiency because the ratios of download applications that use P2P is around 1.4.

What on earth does this mean...? In simple terms, you need to provide 33% more capacity for watching TV as you would for viewing the same volume of data on the web because you have to build for the peak unless you want congestion on the network. Furthermore, congestion for streamed services like TV is far more serious than for web access (where building to the 95th percentitle was commonplace).


The chart shows how the usage of various applications varies and where the peak loads are on the respective networks. There is no weighting for file size - the area under each line has been rebased to 1,000 units. The aim is merely to show the peak to mean traffic profile of video is significantly higher than for web and P2P.

This reiterates the point above that for the same volume of data, you need more network for video than you do for other internet applications.

Which makes a situation which is already very bad, even worse - the capacity that we actually use today is only a fraction of what is available on existing local loops. Average usage of around 5GB per month on a 2Mbps circuit uses 0.8% of the connection's maximum capacity. There are over 8 Exabytes (8,912 Petabytes) per month of unused capacity on existing networks.

A 2Mbps link is enough capacity to deliver 146 hours of 1080p programming per month - the average household watches just over 100 hours per month. What we have today could deliver what we need tomorrow.

It highlights the inefficient use of the total available resource... The problem is "on-demand".

Conclusion
Video is the only application that looks remotely like driving demand for fibre. Assuming for today that we need to move video over from its existing broadcast platform - a case worth exploring in detail in another thread - it is clear that there are a number of key areas where we are not ready for fibre to the home.

We do not have the ability to deliver service because of networking issues in the home and commercial models in backhaul and hosting are going to have to change in light of the new traffic demand. But these are functions of evolution that will follow the technical capability as it grows.

Where there are serious questions to be asked are in the supply of power for the next generation capabilities and in the efficient use of the resource that is in place today. Every routing hop is another drop of oil gone forever and do we need to build nuclear power stations next to data centres to support demand there?

It is also clear to me that we are not using what we have in place today. Perhaps we should stop to think about that too before ploughing huge sums into delivering yet more peak capacity?

The removal of the bottleneck in the backhaul means that it is only the commercial model preventing full-time wirespeed usage of connections. For 70%, this is 2Mbps plus. Even if you need 10Mbps for the video itself, technology is evolving that predicts what a user might want "on-demand" and pre-loads it for viewing at 10Mbps.

This offers the network provider a way of maximising resource usage. If you can fill the unused capacity on the network today instead of pushing the headline speed, you don't need the expensive infrastructure upgrades.

There are clearly areas where there is a vibrant market for connectivity because of recent regulatory efforts to encourage competition. But this risks leaving a subset of the population behind with access speeds below what might be necessary - 30% cannot get 2Mbps. This is the area where lobbying and regulation should concern itself, not with the drive to 100Mbps.

Labels: BT, digital divide, FTTH, next generation networks, Ofcom, timeshift TV, video on demand

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Labels: 21st Century Global Summit, AT+T, Google, iPhone, ISP Products, next generation networks

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"He's leaving for family and personal reasons" - really? With immediate effect?

I suppose it is just possible that a close family relative has suddenly been taken very ill and needs the now former Virgin Media CEO Steve Burch at their bedside for a prolonged period of recovery. I suppose that it is just possible, but surely that would be preceded by some form of compassionate leave before it was clear that this was the only sensible solution.

What a Load of Tosh
No, I don't buy it and neither does anyone else. We all know that these words are often trotted out when face needs to be saved. In reality there are one of two possible scenarios:

Scenario 1: The board have decided to sell Virgin Media and Burch disagrees with that decision because he thinks that he can still turn the company around. The company needs him out of the way to go ahead so Burch's contract was bought out.

Scenario 2: The board have decided not to sell Virgin Media because of the volatile debt markets and Burch disagrees because that was his exit strategy. Plan B was to throw his toys out of the pram until a compromise agreement was the only option.

It could be because of poor results, but even when that happens there is normally a gradual easing out of day to day duties, staying on as a Strategic Advisor of sorts while someone else is sought. Not this time - Burch is gone with immediate effect - which can only mean a pretty sizeable bust up has occurred, probably between Chairman and CEO. I wonder if there was shouting and even whether objects were thrown?

Either way, it is unlikely that we will ever told - they have obviously agreed some form of exit plan, almost certainly containing a gagging clause on both sides. It's a shame in some ways but all we will know is that there's a cover up going on. [UPDATE: Burch left with a £3.5m payoff. The Times has an inside line on the events that led to his departure]

Steve Burch RIP (2006-07)
Putting Burch's time in context, he joined in January 2006 and is leaving in August 2007. In that time the company spluttered through its NTL/Telewest integration, acquired Virgin Mobile, rebranded as Virgin Media and then Lost all of the relaunch's goodwill practically overnight. [UPDATE: This may not have been Burch's doing]. Oh yes, and they also lost their position as the UK's number one broadband provider.

Burch's major initiative was four-play. Since he joined the company they have done loads with the proposition. 4 for £40 makes for some great marketing. The imagery is attractive as you would expect from Virgin. There is nothing wrong with the presentation.

Furthermore, he reached out to the other 53% not on cable with a hybrid Freeview box making it clear that they were serious about addressing off-net. But they also made clear were not going to roll out any more access network of their own any time soon when they did their LLU deal with C&W.

The sales and marketing department will have been happy as it allows them to sell to the people they already reach with their message but aren't on cable. But commercially does it make sense to spread your resources still further and to compete where you have no advantage?

A Questionable Strategy
Some wondered whether four-play was what the market wanted. Personally, I thought that buying Virgin Mobile was a great move because loose bundles had already been working well for NTL locking in triple play spend and making customers less price sensitive.

My concern was that four-play meant of a round of price cuts and that NTL was shifting to focus on growth because my research showed that NTL's customer simply were not price sensitive. For NTL, cutting prices did not lead to growth and putting them up did not cost market share. It seemed that cable customers wanted something different from TalkTalk and yet the company misjudged this and tried to compete on price.

The end result was a lot of customer who did not need a price cut, got one anyway - taking chunks off the company's bottom line at a time when investors were sweating on a return. Yes, they increased the dividend by 50% earlier this year and last week by a further 33%, but this was to a paltry 4 cents - an annualised ROI of 0.7% on today's share price. They have been trying too hard to grow while their investors have wanted something different.

Virgin's Problems
The problem for Virgin is the basics. Service provision, customer care and billing (all the boring stuff that's so easy to ignore). They need to start being nice to customers - although they are not alone with this problem. BT, Orange, TalkTalk and Tiscali all join Virgin with less than half of their customers satisfied with the service.

What is under the hood at Virgin is probably a mess of diverse networks and systems from countless acquisitions and partially completed integration projects. When this happens in a Telco, random things break, causing customer outages and making staff look stupid because they don't have good information on what is actually wrong. The core network service delivery capability is there; Virgin's problem is making it work.

The Virgin brand was supposed to solve this perception problem, but this was a sticking plaster to deal with the result of a train wreck. The result was that the reverse has happened: "Virgin" now has the same negative vibes as "NTL" once did.

It was not always this way... NTL, if you recall, started as an attractive, cool brand too, with its football shirt sponsorship deals and the rest. Over time, the coolness turned to coldness as NTL became synonymous with poor customer service. NTL + Telewest = Virgin = Chaos.

Virgin Media hasn't helped itself. Its opening gambit, a PR move that was a victim's plea against the dominance of Sky, crippled the company. It might have worked for Virgin Atlantic against BA in the airline industry, but it is worth noting that Virgin Atlantic didn't tell passengers mid-flight that they might get Lost.

What Next?
So now they are back at square 1. They might even be at square -1 after the price cuts, but the rump of the business certainly has a future no matter who owns it. If it can survive bankruptcy, it can survive losing a CEO or two and even another change of ownership.

If they can fix the service issues and rebuild customer confidence, Virgin will need to go through a period of consolidation, much like BT has done since its rights issue in 2001. Virgin need to show that they can operate a cash cow for a few years, rebalancing their finances and rebuilding investor confidence.

Whichever way you look at it, it smells of anger ruling over reason. The value of the company has been diminished by Burch's departure - the share price fell by 1.5% following the announcement on a NASDAQ market which climbed by 0.5%.

Losing their CEO so suddenly is only going to increase the attractiveness of a buyout bid to shareholders, even if the bidders may now feel like reducing the price because of the commotion. If Burch was ousted to oil the mechanics of a sale, it will have been a very poorly calculated move for that reason.

Alternatively, if Burch left because the company wanted to remain independent and he wanted it sold, even now, he may still get his way. Losing another CEO may well be the last straw for some shareholders who may want to bail out now at whatever price they can get.

The problem with digging in is that bringing in a new boss is a long term project. Whoever they bring in will want to bring in their own people and conduct their own strategic review - all of which would burn another 6 months or more. The problem is that I just can't see the shareholders waiting that much longer for an ROI.

Fibre on Hold
Whatever happened over the last few months and whatever happens in the next chapter, the big loser has been the UK market which needs a strong competitor to BT if the market is going to deliver fibre to UK homes. Lets face it, no one else is going to fibre up the UK at any point in the near future. It is BT or Virgin because they are the only ones with anything like the capacity to execute the build.

Clearly, BT aren't going to do so at the moment because there is no competitive pressure. They can fight LLU with 21CN, the only reason to do FTTH would be if someone else was heading in that direction but they are not - certainly now that Virgin is in further turmoil.

For BT, this means that there is nothing to be gained (or losses to stem) from the possible £10bn of incremental investment (to cover 90% of the population) because BTs existing network is good enough to give them control of over 60% of the market. Why spend £10bn when you get the rewards regardless?

The Market Needs a Strong Virgin
Virgin Media are the only other company in the UK competing with BT infrastructure in the last mile, but they are light years behind BT in their preparedness to upgrade their existing facilities. Virgin are not going to do FTTH until they have been through the same rebalancing that BT has been doing this decade. Would you lend Virgin money to do FTTH right now given their history? No, I didn't think so.

In order to rebuild the confidence of investors, they need to return some value to long suffering shareholders for a consistent period before embarking on a further wave of investment. Whether this return comes from ongoing operations or from a buyout doesn't actually matter. If the company is bought out, the new owners will need to get their ROI before embarking on another investment wave.

Hard Work Needed
One way or the other, Virgin needs to spend some time on a get-well plan.

Delivering the ROI from ongoing operations will take a massive effort to properly integrate NTL, Telewest and Virgin Mobile from the bottom up - not just on the company's brochures. Funnily enough, delivering an ROI from a buyout is going to mean the new owners have to do the same. Either way, there is a long term project ahead.

Investment will have to be inward during that time because it will take a huge amount of focus and a ruthless instinct to drive up margins by cutting waste. No-one is going to like working there while this is going on.

A Lost Opportunity
Perhaps it would have been OK had Burch not Lost his way and tried to take on Sky. [UPDATE: The Times suggests that this was not actually Burch's decision, that in fact it was taken by Bill Huff and Jim Mooney]

I think though that there were and still are much deeper issues that have been brushed under the carpet. There has been too much marketing and not enough integration going on in my view.

They cannot hide from the need to do the hard work. Buying companies sounds easy, but combining them effectively is one of the hardest jobs in the telco world. But it needs to happen because sooner or later, cracks will start appearing through the marketing - destroying the perception you are trying to create. If this means that innovation goes on hold until the work is done, then that is a cost of the acquisition.

If Virgin can do the hard work, they will be able to improve returns to shareholders meaning that eventually, there will be another window to invest. This may be five years away or more whichever ownership route they take, although they need not worry too much about their competitive position as no-one else is likely to take the step to fibre before them. BT will just be milking the profits of their broadband and 21CN investments in that time. They don't have to move until Virgin do.

Which is why we should all be sorry at Burch's departure. More specifically, we should be sorry at Burch's failure, because in it we have lost yet another period of at least 18 months and probably a lot more in our race to fibre up the country.

Labels: BT, FTTH, next generation networks, Vigin Media

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When you write to a word limit, as I did in my iPlayer Politics piece for The Register, there is often a fair amount that hits the cutting room floor. This article is going to pick up on a few of those themes and tries to answer an excellent question I received on the piece.

The Question
The question from Chris Fraser really gets to the heart of the debate from a user's perspective. An educated user, yes, but a user nonetheless.

"Why is it that once again we are being told by UK ISPs that our systems are not capable of delivering the type of service that has been available on the continent for some time? I am willing to believe that maybe the infrastructure is not up to the task. If that is the case why are they not willing to make the same investments as their European counterparts?

"Please can you give me a legitimate reason why Ofcom should not be forcing these ISPs to put their hands in their pocket and actually pay for a less out of date infrastructure when some of them are posting huge profits in their yearly financial accounts reports?"

History of UK Internet Access
The answer to this starts in the mid 1990s when internet access was via dial up and the vast majority of internet content was in English (US English to be precise). At that time, France, Italy and Spain in particular lagged behind in adoption rates because of the language barrier and so when DSL came along in the late 1990s, there was little to lose for the industry to make the step straight to DSL.

The other factor was the pricing schemes for dial up access. In the UK thanks to Freeserve, as elsewhere it became well established that dial up was via a local rate number. The difference was that local rate at peak times in the UK was close to 4p per minute. In France, Sweden and the Netherlands it was closer to 1p.

The UK's 0845 scheme was set up to provide artificially high (excess profits) to companies willing to invest in voice switches. This decision was made before dial up access was popular and was originally intended to spur competition in the voice market.

The result however was that dial up minutes swamped everything else and new entrant voice operators (OLOs) were guaranteed the lion's share (~70%) of the consumer price. A lot of this went in revenue share to ISPs, who had control over whose network their users 0845 minutes were carried by.

So with this nice gravy train benefiting OLOs and ISPs alike, no-one really wanted to do broadband. It took until 2003 for the latent demand to explode and DSL to really be taken seriously. This was fully 4 years behind France - a gap which we are probably still seeing today.

Other Factors
Population density is also a factor - Paris, Amsterdam and Stockholm is where the most notable OLO FTTH projects are now appearing in Europe. There you have a lot of multi-tenancy buildings which are much cheaper to connect than the individual dwellings we prefer here in the UK.

Laying fibre is not cheap, £600 per home in a city or thereabouts. If all you are doing is spending money to serve the same amount of revenue (prices do not go up when bandwidth increases) you get into the Broadband Incentive Problem. That's an article in itself but it is worth noting that BT may well soon start building fibre networks in new build estates - no copper, just fibre - where there is not the cannibalisation issue.

The Digital Divide and Natural Monopolies
The other issue that needs to be thought through is the whole Digital Divide problem. Is it right that ever faster broadband speeds are made available where it is economic and not where it is not? We have the luxury of being able to consider this still, because when you get to where France is now, you are on a one way street and may have to use significant state funds to address the problem. Do we as taxpayers want to do this in the UK?

The problem in my view is that telecoms infrastructure is a natural monopoly and competition is artificially imposed. The most efficient model is one network big enough to serve all and using cross subsidisation to level out inequalities in pricing and access speeds. Of course then the issue is not an economic one but a behavioural one.

Behaviour is less of a problem when you have multiple companies essentially reselling the monopoly asset at a regulated price, but then the problems are economic. All ISPs can do is stick a badge on the product and do some creative packaging. The value we as consumers see is not from the bits and bytes - they are a necessary evil - so we look for our broadband to be as cheap or as free as possible.

The LLU Factor Makes the Price War Worse
Some would argue that the last paragraph only describes the IPStream-based offers. LLU is different because the operators own the kit in the exchanges and control the circuits back to their core networks. LLU is cheaper than IPStream if you have more than around 300 connections off individual exchanges and its gets cheaper still the more users you have in that small geography.

There the ISP has an incentive to invest in LLU, but once you have made that incentive there is an incentive to play out a price war to grab market share. Consider the game theory behind the price war.

The reason ISPs lose their investment is because once you have made the investment, the next rational move is to reduce pricing in order to fill the network you just built because your incremental costs are extremely low. Obviously if everyone sees it this way (and they do) you end up with a continuation of the price war, only this time with a much lower floor.

This is not a unique problem for telecoms. Washing powder and countless other FMCGs have the same dynamic - for them investment in LLU is replaced by investment in production capacity. Once you have invested and find competitors have done the same, you might as well throw the original business plan away because the pricing power assumptions you might have made are just no longer there.

Recreating the Monopoly
The way out of this predicament is to rebuild your monopoly power through acquisitions, but when you do that you are again paying over the odds because the companies are valued by stock markets knowing the very weak position in which the buyer finds themselves. That's why so many companies that went on acquisition sprees find themselves in a bankruptcy position. The Goodwill you are buying is just not real because the product is such a commodity.

The final problem is that if you are really successful and get too big or rebuild the monopoly too far, you have the spectre of regulation and consumer group pressure as the US carriers are now finding since the re-creation of AT&T.

The Incumbents
The above is a very long winded answer to most of the question, but it still only deals with the position of a competitive carrier. The position of an incumbent is very different indeed.

There are really two incumbents in the UK - BT of course and Virgin Media will all the old cable franchise assets. I'll come back to BT in a minute because that is where the profits that Chris mentions in his question are being made.

Virgin has found itself in a strong market position - a superior service technically to BTs for the 47% on a cable run - but in a mess organisationally. Trust me, acquisition integration is nowhere near as easy as the CEOs will perhaps suggest in their briefings to investors. I liken it to spaghetti - a lot of customer service and network management systems that have been designed in isolation but have been brought together under one brand. I feel a huge amount of sympathy for support agents dealing with quad play customers because the information they have at their disposal is so poor!

BT is very different - they have a monopoly over the infrastructure serving the 53% and they face a very different problem. They make huge, humongous investments on a periodic basis like they are with 21CN which give them far more capacity than they need immediately on the routes they build. They are regulated to wholesale this product but they can't suddenly drop the prices to their new costbase because there is no immediate demand, so they have to leak it out gradually.

Nevertheless, both incumbents are in the same position: they have made investments and their shareholders want a return before the next wave of spending is released. Virgin in particular need to give back before they take more - which is why Private Equity has been circling the company. Both BT & Virgin have assets and market power and are in a position to make significant cash returns by slowing investment.

There is also the point worth considering that if BT moved too quickly fighting tooth and nail for the attractive markets, it could obliterate the competition that Ofcom has strived for twenty-something years to foster. Sure that would address the speed and capacity issue for some, but leave BT as a re-established monopoly responsible for a widening Digital Divide. Be careful what you wish for...

Ofcom's Attempt to Solve the Problem
So onto the final part of the question: what is wrong with Ofcom's gunboat diplomacy - get all these players, the OLO/ISPs, BT and Virgin to invest in a network for the 21st century and not just the 202nd decade?

Perhaps nothing, it was a similar strategy that led to the change in attitude by BT which got us to where we are now. Line everyone's business models against the wall at gunpoint, shine a light in their eyes and ask them some difficult questions.

Notice that I haven't mentioned the iPlayer at all in this analysis because the picture is much much bigger than the BBCs rather limited application. It could as much apply to YouTube, Joost or any other mass traffic source like Google or Yahoo!

The problem it seems to me is that it is very difficult to work efficiently at gunpoint. What is needed is for the ISPs and the content owners to stand down from the confrontation that has been bubbling up ever since AT&T vs Google in the network neutrality debates and work on a better way to make sure that the money flows down the value chain. It is absurd to expect a commercial entity to invest without the promise of stability and an ROI. ISPs today have neither.

Conclusion
The iPlayer's unique position as a free, advert-less, quasi-publicly funded product makes it an ideal political football. We are behind because of the unintended consequence of a regulatory decision in the 1980s to regulate NTS - long before most people had ever heard of the internet - and Ofcom is using the iPlayer as a battering ram to solve the unintended consequence of its actions years ago.

There is a very real danger that yet more aggressive action could have further unintended consequences. Ofcom may argue that actually it was the BBC Trust that had the final say on the iPlayer, but it would be naive to believe that this approval would have been given had Ofcom raised the ISPs concerns more strongly than they did in the MIA.

They may have plausible deniability but I think Ofcom knew exactly what they were doing and perhaps it will have the intended result - but it is a high risk strategy.

Labels: BT, digital divide, FTTH, iPlayer, ISP Products, next generation networks, Ofcom

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Sometimes, you see something so elegant and simple, you wonder why no-one thought of it before. An old colleague and regular visitor to this blog contacted me the other day to advise me to check out Arootz - and I'm very pleased he did.

A Relative Unknown
I wish I could claim an exclusive, but I can't. They have been in BusinessWeek & the Jerusalem Post already but it appears that the point was lost on most people. There are only 53 blog entries on the company, the vast majority seeming to repeat BusinessWeek verbatim while most of the rest focusing on the fact that the company raised some cash recently.

One article I found does add some value, commenting on the BusinessWeek piece rather than just repeating it - more questions than answers, concluded Businessofvideo.com - and I agree with that part at least, but perhaps Mr Rayburn had a lot on that day because he didn't actually ask the questions. I have asked the questions - I contacted Arootz and their CEO replied with a significant amount of detail - and having looked into it, I have to disagree with the negative thrust of what Dan says.

Old Technology, New Ideas
It is true that multicast has been around for ten years or more. I know, I was at UUNET 10 years ago when UUcast was being hyped and developed in parallel. As with most other attempts to use multicast, that product failed to find a market because in the end, all it was doing was replacing broadcast and as we all know, if something isn't broken...

Multicast has again come back into people's thinking recently as IPTV services have been rolled out using the technology for the linear (live viewing) portion of what they offer. The problem there remains that multicast has not catered for timeshift behaviour. If you want on-demand, IPTV has to unicast and that means that you use a whole stream all to yourself.

I was discussing this problem with an eminent industry architect back in April at the ISP Forum event - his suggestion was staggercast, which effectively means a multicast stream of a programme being distributed every N minutes, much like Sky's multistart service for prime time movies. It was a definite improvement on multicast / unicast combinations already in use, but doesn't really tick that on-demand box.

Businessofvideo.com is also correct in highlighting that personal storage has also been around for ever. Quite right, it has, but what Arootz has done is combine this with multicast so that the network sees one stream and yet everyone gets a copy that they can watch what they want on demand. It's a mashup of two very well understood technologies and that is the simplicity that I refer to in my opening statement.

The Solution in a Nutshell
In summary, there are 3 elements - Distribution Servers where the content owner injects content, a Multicast enabled network and a set of user Multicast-2-Storage (M2S) agents sitting on PCs or STBs. Arootz sells this CDN as a managed service to content owners and works with the ISPs to make sure that multicast is turned on over the network. I'll come back to the web of relationships later in the article, but I will focus first on the service piece.

Targetted Adverts
My initial reaction was: ok, sounds good they've dealt with on demand but if you are multicasting, you miss the personalisation capability that must be at the centre of IPTV to make it a step beyond broadcast. Erm no, they've thought of that.

"The ads are delivered to storage ... based on the advertising targeted parameters, the decision which ad to show is targeted individually (based on a doubleclick server somewhere) and then the ad is inserted in real time into the video stream but since it comes from storage, it is fast, high quality and real time." Arootz's CEO Noam Bardin.

That's clever - the media and the ads are delivered separately and reassembled to create the final, personalised media file...

Navigating Uncharted Waters
What about navigation and finding what you want among the wealth of possibilities?

"We allow users to subscribe to RSS like feeds from a variety of sources ... We provide interfaces for preference engines to assist in selection of content such as 'the highest rated channel based on yesterdays actual viewership' or 'all content with the word Shark somewhere'" (Shark is of course an example of something you might be interested in.)

Hmm, I like that too. This is the elegance - mashing up social networking, RSS and an EPG into something that can cope with the huge volumes of content...

Huge Volumes of Content
Arootz estimates that the average user consumes 125GB of content per month. Obviously it depends on resolutions: it might be a fair bit less than that for standard definition TV, but if we were talking about 1080p, we could be looking at four times that figure. Is 500GB a lot of data? I think that depends on whether you are a unicast network or a hard-drive.

Terabyte drives are the basis for Arootz's business model and that starts to explain why you have not seen this model previously. Storage has always been far too expensive to make plans like this work but Arootz reckons that by 2010, you will be seeing cost effective drives offering 5 Terabytes... At this point, the limitation is back on the network.

Multicast takes care of the core network capacity issue because as with caching models I have discussed previously, each media file need only be sent once to each exchange and not once per user as with unicast delivery. This saves many thousands of identical 2Mbps plus streams and brings us back and the point where the bottleneck is again the physical speed of the local loop.

Use Case Example
While Arootz claims that its service only uses off-peak capacity, this is a configuration option that can easily be changed. The idea is that you watch live TV via the live multicast feed. If you are not watching (or are watching and have some spare network capacity), other programmes are sent down to you and stored on your machine. You pull these up on demand.

Of course you can't download the entire programme catalogue. Lets say there's 10 channels that make up your regular viewing, you can't even download everything on each of those unless you have a very very very fast connection. Choosing which programme to download (because you might want to watch it) is the job of the M2S AI agent.

The question then becomes whether the AI is good enough to make sure that the file you want is already on your hard drive when you come to watch it. Backing that up, there's the fall-back unicast option in the event that you are feeling a bit wacky today. It looks like it might hold together.

You might even find that the model allows you to escape some of the shackles of the local loop speed as it allows you to watch delayed feeds at 720p (6.4Mbps) even though your line may only just be good enough for 480p (2.5Mbps). A 2.5Mbps connection maxed out enables you to receive something like 800GB per month. For 720p content you need the AI to give you a 40% hit rate (you watch 25 hours a week, it downloads 65 hours that you "might" be interested in).

So Far, So Good
Arootz links multicast with storage and adds personalised RSS subscription with targeted advertising. Sounds good so far doesn't it? The software assets they have are clearly well thought out and fill a growing need. But what about the issues?

The weakness of the Arootz model is that it requires each link in the chain to be working in harmony. The content distributor must plant the content on the CDN, the ISP needs to multicast the channels and the PC or STB hardware requires the M2S software to take advantage of the storage and run the channel selection process.

Conflicts in the Supply Chain
These three parties are not exactly in cahoots. The interests of content and network are juxtaposed and that led to the Network Neutrality issues of 2006. Sitting uncomfortably with a foot in each camp are the hardware companies. Only Sky, with assets in each area following their acquisition of Amstrad last week, seem remotely aware of the need to align the interests of the players in the supply chain.

Although Arootz has an elegant solution to the video unicast problem, they need all elements in the chain to see it and play along to make it work. Without any one element, it breaks down. If they work together, everyone wins. So who is pulling it through so that the vision becomes a reality? As with other efforts to bridge these gaps, is it a question of chicken or egg?

"Look at it differently – if you believe (and I do) that most of video is going to be consumed off IP networks then there is a scaling problem with the current technologies. This scaling is quality, cost and technical. The main bottleneck is the network and our solution is the only cost effective way for this to happen. It may not be us but it will be multicast based. Just like internet advertising was dead in 2001, premium content would never go online in 2005 – Multicast will have to rebound because unicast cannot scale to deliver the cost/quality we expect." Noam Bardin again.

I agree with everything he says there, but it doesn't really answer the question. What is the incentive for each party to play ball? I think the answer is actually much more simple.

Cash. Cold, Hard Cash.
The commercial model is that content owners pay Arootz either as a straight arrangement or as an advertising revenue share. Simple enough so far, but in parallel, they are selling to ISPs.

"Our offer to them is 'let us accelerate your content on your network such as VOD, Internet TV and other components'. We will then wholesale the access to 3rd party content owners and provide them with a revenue share back so that they get more content distributed on their networks, more efficient distribution (less load), they get a slice of the action and thus are part of the value chain, unlike P2P where they carry the cost but are not part of the upside."

Aha! Someone is taking the bull by the horns and putting in place a way to route the money so that the networks open up and get paid for carrying content. It would be easy to think that the netcos should be happy with cost savings, and try and keep the distribution fees to themselves, but this statement above all the others shows that Arootz is pragmatic and understands that a virtuous circle needs to start somewhere. And the hardware?

"It can be embedded in software or hardware, it provides distribution and targeted advertising capabilities" and "we are not the brand"

Where Next?
As with every small company, there are a million things that can go wrong as larger and better funded alternatives try and achieve the same thing. That said, the technology that Arootz has and the pragmatic approach shown by their commercial model is an excellent starting point.

Channels to markets (they are in many) still threaten to derail the company as putting together the video supply chain involves dealing with some very heavy hitters. It may require the sponsorship of one of these big players to get the ball rolling, but this is a solution where without compromises, everyone wins. Worth keeping an eye on...

Labels: Arootz, catch-up TV, IPTV advertising, ISP Products, next generation networks, targeted ads, timeshift TV, video on demand

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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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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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This article is a direct follow up to the piece that was posted last Friday on The Digital Divide. There were a couple of comments posted that warrant a detailed review and rather than try and squeeze that into a comment reply, I felt it would be worthwhile to create a new post for the purpose.

Firstly, on line lengths. I have had my attention drawn to the charts on page 21 of the BSG report, "Pipe Dreams?" These show the extent to which copper loops meander around the country on their journey from exchange to the home. So while my data in the original post showed that only 9% of households are more than 3kms from the exchange in a straight line, the longest 10% of loops are in fact over 5kms long. I am copying the charts here, the data for which originally came from Point Topic and BT.

Interestingly, this data has also been interpreted (by the BSG) to derive the speeds which the group expects users to achieve. The data shows that while in excess of 90% of the population should get 512k "broadband", only 30-40% should receive 8M "broadband" even using ADSL 2+.

Only 40% of the population will notice any speed difference from ADSL 2+ compared to ADSL Max. That is the point that David Brunnen makes in his comment and he is right: without any shortening of the loops, 60% of us are stuck where we are now.

David Harrington, Leader Regulatory Affairs at the CMA, notified me of the recent resolution passed by MEPs on 19th June, where among other things, they called on member states to ensure "a future where no European child and no individual involved in educational programmes is left off line in Europe".

"Think of the children" is an evocative call, but in this case I think it is a fair enough plea. Education is one of the major beneficiaries of the leaps in technology over the last 15 years, with the PC (teacher can now read your homework) and of course the internet (your homework might teach the teacher something). If the historical infrastructure that this generation has inherited is not up to the job in some places, there will be massive inequalities in the standard of education available to different children.

With that in the background, perhaps you might expect some leniency with regards to the state aid issues raised by Mr. Brunnen in his comment, when governments start trying to level the playing field between citizens and with their neighbours. The need for this levelling between countries is partly evident in the table posted over the weekend on the Broadband User Group site, that shows the average retail cost per megabit per second throughout the EU.

The UK is clearly in a 3rd tier with the likes of Portugal, Spain, Poland and Ireland. My suggestion to those in the UK wishing to lobby for the rules on aid to be set aside would be to take a step back and let those countries fight the battle for you. The EU seems to find it very difficult to say no when those four come cap in hand... For the big bad UK to come and demand special treatment evokes memories of Thatcher, Maastricht and Vetoes which we are still paying for in political currency even now.

The comment by JFK raises an interesting contradiction for me. The Digitally Poor in Kent and Essex clearly do not have the same ability to pull at heart-strings as do their peers in rural Wales, but they if they are disadvantaged to the same level is this fair...? There is a risk here that social jealousy can lead people to think that hey, these people are rich and can afford to sort the problem out for themselves, why should I pay for it in my tax bill?

The Digitally Poor in those counties may be Commercially Rich in comparison to the folks in Dyfed, but I would argue they are still not rich enough to be able to afford to rectify the problem for themselves. They can't go out, hold a village fete and expect the proceeds to fund a new telephone exchange - this is an expensive upgrade we are talking about here. You'd have to be David Sullivan to be able to afford to solve the problem for yourself.

At some point your economic prospects and social and physical well-being might be determined by the length of the copper wire connecting your house to the rest of the world. At that point, the residents of Essex and Dyfed alike might expect their follow UK citizens to ensure a level playing field, much as we've had in the past with the roads or the railways. Is subsidising the broadband access any different to the subsidisation of the transport system?

My illustration in the last post about how much difference two miles can make was a real-life case study. Two miles from where I live there is a village called Shepreth. Its a nice enough place, like every other village it has a recreation ground, but Shepreth also has a primary school and a pub that has been converted into a fancy wine-bar / restaurant - making it a home from home for the Londonders fleeing the nightmare of city dwelling.

On top of all this, Shepreth is lucky enough to have a wildlife park with a couple of tigers and a mainline railway station on the London line. Until recently, the only downside was that it had a pig farm and when the wind blew on a hot sunny day, the place earned its nickname - "Stinky Shepreth".

Shepreth though is connected to the Melbourn exchange, which as the crow flies is 3.5kms away, over the fields and across the A10. I can't tell you the copper lengths, but having lived there for 6 months, I can reveal that the best internet connection you are likely to get is between 500k and 1M, even on ADSL Max. Having moved two miles up the road and now that I am connected to a different exchange, I now have much higher speed access - not 8M by any means, but at least 5 times what I had in Shepreth. Is this fair or is it just life?

Of course I don't think that this is a life and death matter (yet), and any impact on welfare will take a long time to become clear enough to justify my council tax money going into subsidising the resolution of the issue.

When I first read the BSG Report my view was that we should let the market do its thing and I still believe that the likely result of interference is a massive knock on distortion of the rest of the communications market. What I had failed to consider at that time and is becoming more important in my thoughts now, is the shift towards using the internet for social welfare purposes where people, regardless of their economic power, deserve to be treated equally.

Labels: BT, digital divide, FTTH, next generation networks

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Prologue
In my recent Broadband Dividend post, I looked at some of the reversals in rural decline directly attributable to the availability of broadband in those regions. There is a strong case for governments to ensure that there is ubiquity of access, particularly as it is an effective means to maximise the utilisation of scarce land resources and provide welfare and social services to citizens online.

Philosophy
Is there a right to broadband? We are not there yet, but there is a point, when broadband is a driver of economic and social prosperity well beyond the telecoms value chain, that this question will arise.

Past experience suggests that when there is a technology step, densely populated areas get the service first, but the rest catch up in time. It happened when broadband first arrived. There was a time when some had 512k, while others has just 56k - no-one died... Slowly but surely people caught up.

They did catch up, didn't they? Well yes and no... Yes they got "broadband", but because of line lengths "broadband" for them means 1Mbps. For people in LLU areas "broadband" can now mean 16Mbps or more. We are seeing two-tier services and two tier pricing where the haves spend less and get more than the have nots - twas ever thus. Is this wrong?

Is it wrong for petrol to cost more in Norfolk than in London? Perhaps not, but is it wrong to expect the residents of Norfolk to ride a horse to work because there are no public roads? Maybe yes... but if it is wrong, then who has the responsibility to right the wrong?

Warning: Capitalism at Work
Certainly, without legislation or regulation demanding it, the operators themselves cannot be accused of being responsible for the Digital Divide. They are playing strictly by the rules of capitalism which is the basis of their existence.

To be fair to BT, they built out the basic service almost everywhere, even where the revenue for doing so probably wasn't worth their while. They have blended their costs enabling them to build out to all but 0.4% of the population (subject to line conditions and length...) and have improved performance further with the ADSL Max upgrade. BT have invited competition to help them grow the market, but they have made Wholesale work for them.

But for a commercial entity, there is a point of diminishing returns, where taking a hit for the brand value of broader coverage no longer makes sense. Competition from LLU in the markets that were profitable brings this point clearer into focus for BT, especially knowing that the current installed hardware requires an expensive refresh via 21CN to go any faster.

Consider the competitive environment: at a recent industry conference, a senior BT exec revealed the following approximations of LLU competition. Around 1,500 exchanges have at least one LLU Operator, of which

• 450 have only have one LLUO
• 625 have between 2 and 5 LLUOs
• 400 have more than 6 LLUOs
• 1 exchange has 11 competing providers

So there is competition for BT meaning ADSL 2+ available already to 80% of the population. To keep up / leap ahead (depending on who you believe) BT is building out its 21st Century Network.

21CN Solution to a 21C Problem
21CN is starting with a controlled rollout in Cardiff and will then cover the rest of the country, starting with the bigger exchanges. It will take a while for it to filter down to the regions. During that time the haves might have 20 times faster connections again than the have nots, but eventually the have nots will catch up.

It might be a bit more than 0.4% of the population that miss out this time, but my exchange is in the smallest 3% and the switched-on date for 21CN is in the Spring of 2009. So some people will have to wait... It didn't matter last time, so why should we be concerned about it now? I'll get ADSL 2+, just not for a couple more years.

It seems clear to me that the 21CN commitment will deliver me and almost everyone else in the country who live within 3km of our exchanges, a substantial boost in bandwidth. We might have to pay more for our petrol, but at least we can put the horse out to pasture.

BT Wholesale fairly recently changed to a tiered exchange pricing model, meaning that the operator's access costs more in the most rural locations, a bit less where there are a few more people and a lot less where there is competition. Does this condemn the digitally poor to forever receive higher priced services? If it does, it is not however, BT's problem.

The Case for Subsidy
If the government's act of opening the markets risks causing social inequality by removing BTs ability to cross subsidise, it may have to be the government that take responsibility for rectifying the issue using its own means of cross subsidisation: taxation.

The Mechanics of the Digital Divide
For sure, there is enough bandwidth for most people now, certainly enough to meet their basic needs. But there is an underclass for whom service is not going to improve without new exchange builds. Those stuck more than 3km from their exchanges are effectively stuck below 8M, whatever technology is used and even getting to that rate may cost a bit more cash. QoS looks like being most attractive where speeds are lowest (sound familiar?).

To go faster than this, copper loops need to be shortened. About 2.1m households are connected on copper lines more than 3km from the exchange. This figure is as the crow flies, so bear in mind that copper wasn't laid by the Romans and so tends to be a fair bit longer than its straight line distance.

Shortening the loops is where Fibre to the Node (FTTN) comes in. In the UK, where there are just under 6,000 exchanges, these connect out via 90,000 or so Primary and Secondary Cross-connection Points (PCPs and SCPs) and 2.5 million distribution points. These PCP/SCPs would need a massive capacity upgrade (the F in FTTN), but there is also a big problem with physical space, power, cooling and security, all of which would need to be enhanced. But it doesn't sound like BT wants to do it, and they are returning cash to shareholders instead of saving up for the next big upgrade.

A Digitally Divided Britain
What happens when the bandwidth required by "basic needs" reaches the 8M ceiling imposed by the copper line length for the 9% or so who live more than 3kms away? The availability of 20+ megs in some locations will allow services to develop to fill the available capacity. If those services are life changing, in the real sense that they offer new economic opportunities or provide access to enhanced personal healthcare for example, you have a problem.

At that point you can probably say that there is a Digital Divide, because for some, use of life changing technology will be impossible because of network constraints. The Digital Divide is determined not by the exchange you are connected to, but by how far you are from that exchange.

Rectifying this will cost a lot of money and such investments are likely to have low yields as the worst affected exchanges are the usual suspects - those that are hard to reach anyway, with low densities even before you break the base down further by extending the core network to the cross-connection points.

Where are the Digitally Poor
There are no surprises when looking at which regions are worst effected. 24% of Lincolnshire's population live more than 3kms from their exchange. This is 25% in North Yorkshire, 28% in Cumbria, 29% in Dyfed and 30% in Co Down. For the Scottish Islands and Highlands and rural Northern Ireland this % is much higher, but over this entire area the problem base is only 93,000 households - just 10,000 more than are impacted in Lancashire alone.

So don't think of this as a problem that just hits the hermits among us who like to live in the middle of nowhere. There are 83,000 people in Lancashire (near Manchester), and 66,000 in each of Essex and Kent (near London) that also have lines longer than 3kms. Here the inequality problem may be more acute. If you move to the Isle of Tiree, perhaps you are expecting to get away from it all - so what if you can't get faster broadband? - but if you live in Kent some might expect to be connected better than you are.

It is in these areas where the Digital Divide might be quite stark. If a village is stuck on 8M and you can get 20M two miles down the road (in the same "good school" catchment area), you might see an impact on that most precious of post-Thatcherite Britain's benchmark - the value of our homes. Why? Because by that time 8M is not enough and puts you at an economic or welfare disadvantage.

Regional Answers from Regional Government
Regional governments have in the past attempted to get a local broadband provider off the ground in order to address the digitally poor, but levels of success have varied from minuscule to none. The problem in many cases was that the investment was a one off and when upgrades were required, the underlying cashflow was not enough to make it self sustaining. An ADSL exchange with 100 households is never going to be profitable so many of the companies that were created went bust.

Alternative Access to the Rescue?
So what of alternative access? WiMax for example could fill in the areas where scale and geography are a problem. But that's not where WiMax or any other new technology is being deployed because in spite of the competition from wired and other wireless networks, it is still more likely to be economically viable using WiMax over the top of existing networks than it is filling in the gaps between them. The Digitally Poor are digitally poor because service providers can make more money deploying their capital in more densely populated areas, regardless of whether the technology they use is WiMax, WiFi, 3G, LLU or FTTH.

Any spectrum auction where service providers need to pay just to have the ability to offer service simply accentuates the problem by making the the commercial viability of providing access to the digitally poor even more remote. It may be that instead of the operator paying the tax man for the spectrum, it may be necessary in some regions to work it the other way around.

For the rest of the market (the digitally rich in the towns and cities), the overlay of yet another competing technology has the opposite effect. It will prove baffling to the consumer with so much choice on offer, no doubt leading to further price wars and hara kiri amongst the operators. This is may be the unintended consequence again, as it has been so many times before when regulation has opened up new markets.

Certain use of the soon-to-be-available spectrum could offer coverage but might also significantly distort existing markets, where investments have been made on the assumption of stability. 3G of course, but also 21CN and LLU. Can that distortion be allowed to happen? But if it isn't, how can infill be achieved?

Summary of the Problem
So here we have a summary of the problem. Something that solves the problem for the digitally poor is likely to severely distort the market for the digitally rich which may cost more to the economy than leaving the bottom 10% with the scraps. But aside from the numbers, there is the looming question of whether broadband will be a pre-requisite for the economic progression and social equality of a country.

I do wonder what we would arrive at if we were to throw the whole picture away and design it from scratch, and it is tempting to try and right the wrongs when new opportunities arise like the Digital Dividend. I fear however that we were given a spade and some land about 25 years ago and we started digging. Now we have found ourselves in a hole and are tempted to use the spectrum auction to try and dig our way out.

Disclosure
Disclosure: I own 336 shares in BT worth just over £1,100 at the time of writing. I inherited these shares in two batches from my grandparents who bought them at privatisation. I have no intention of selling them, much in the way that I wouldn't sell the paintings and other memorabilia that similarly came to me from my deceased relatives.

Labels: BT, digital divide, FTTH, next generation networks, Wi-Fi, WiMax

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The Question
There's a question that I have been struggling with for a while now. The problem is that it is too difficult to answer, because there are just too many angles for my little brain to cope with.

What is the economic value of broadband to a country?!?

Why does it matter?
The answer dictates the role that governments should play in telecoms policy making and infrastructure build.

After concluding in a recent article that BT were right to return cash to shareholders rather than invest in FTTH, and looking at the (remote) possibility of anyone else doing the same, it has been clear to me that we will be hearing ever more pleas for government intervention (as in April's BSG report). These pleas have come from all over the place, why?

Partly because no-one wants to spend the tens of billions that it may cost, I'm sure. If I want it, but I can't afford it, of course the government should buy it for me, right? Seriously though, is it because the economic value of broadband to a country stretches far and wide, well beyond the "telco value chain"? Can the breadth of benefits ever accrue back to a commercial entity making the investment, without distortion from naive attempts at creating artificial competition?

Market Failure
Of course, post Adam Smith, we are predisposed to giving the market a chance to achieve development and innovation without intervention from public funds, but are the benefits from broadband (the Broadband Dividend) too complex for the market to work out quickly without intervention? Would we have a ubiquitous phone network without earlier (direct) intervention? Where would we be without the phone...? Is the whole market-based philosophy wrong for such a national asset?

Ofcom are busily trying to figure out the Digital Dividend - the value of freeing up the spectrum that is still used by analogue TV - but I wonder whether this is missing the wood for the trees.

They are spending 56% of their £126.7m annual budget on spectrum allocation work, so let's hope they get this right. They can probably afford to put a little of this into answering the bigger question: Is broadband worth anything? Or is it that it will cost us to not have it? The answer to these questions matter a lot.

While it makes sense to look at spectrum allocation policy, I am struggling to understand how this can be ring-fenced from other digital transmission, wired and wireless. In the end, it is all just ones and zeros that can be used for anything from a phone call, to a TV station, a public health service to telematics. Call it digital if you will, but in order to encompass what I think is a much wider view than is described by "Digital Dividend", I am using the term "Broadband Dividend".

What am I talking about?
What is the Broadband Dividend then? Do countries need broadband in order to compete? Or is it even more acute: do their people in fact need broadband to access basic public services - to take part as citizens in society? Perhaps not today, but is that where we are going?

Consider this vision of the Broadband Dividend taken from a Memo to the Select Committee on Culture, Media and Sport:

As connection speeds increase, this digital revolution will continue to change our lives as consumers, as professionals and, provided we create the right conditions, as citizens: a universal [my emphasis - JP] and affordable supply of bandwidth could underpin a sweeping transformation in the delivery of many public services, ranging from the distribution of public information and the administration of bureaucratic processes to the provision of on-line education and health advice. For individuals, organisations, communities and the UK as a whole, this could help unlock new worlds of efficiency, opportunity and productivity.

The source may surprise you - it is taken from a submission by NTL... Admittedly, its dated October 2005, but it was quirky so I thought I'd include it.

What's wrong with the approach?
If this is the future, then perhaps we should be challenging some of the core assumptions underlying current government, regulatory and spectrum allocation policy? Viviane Reding certainly seems to think we should. "I do not believe that high stakes auctions in which only those with the deepest pockets can take part would be effective. We need to encourage investment and competition — we need cheap, wide-band services for all"

If we auction the valuable resources, we artificially inflate the cost of access. Auctions are nothing less than an airwave tax which filter down to increased prices to users. But, argues Ofcom, "It is the organisations that have the business plans to make the most effective use of that spectrum and maximise revenues [that will win out] if we have an auction mechanism."

The Politics
Network Neutrality the Sequel: this time the battleground is the ultra-valuable UHF spectrum, with Google arguing that this should not be hoarded by netcos as a defensive measure against competition for their sunk assets. The problem for regulators is that in many cases, the cost of sunk assets was a direct result of regulatory policy at the time of investment - like the auction of 3G licenses.

Although there may, even now, be a case to tear up history for the sake of the greater good going forward, doing so might trigger a lawsuit or two from those who have invested in the past in good faith. Companies bought licenses or sunk fibre on the basis that doing so gave them a certain competitive advantage over those who did not. If there is a risk that today's investments could be invalidated by swings in regulatory policy tomorrow, that investment won't happen and there will be no Broadband Dividend. That, I'm afraid, is the flip side of the argument: just tabling the possibility of a rethink may ensure a failure in the overall objective of encouraging investment in new capacity.

But that is not how some see it. Of course spectrum should be given away to anyone and everyone, argues Google, how else will users be able to get onto their services? How can we make money if users have to pay someone else first, they might ask (I made that up, but I'm getting an increasing feeling of a dark side to the big G).

Although I am uncomfortable with Google's role in the debate as they so clearly stand to gain commercially from the outcome, their position raises an important point on Broadband Dividend question that I think is being fudged because of the difficulties balancing past policy with future opportunities and needs.

The Greater Good
If broadband is required by countries, to establish favourable conditions for business and to citizens, to enable them to take part in society, we are now talking about a higher goal than can be catered for in a "business plan" as suggested by Ofcom. In fact, business plans and economics in general assume scarcity, whereas the higher goals mentioned require equality, ubiquity and perhaps even subsidy.

Does Broadband become a requirement in order to interact as a citizen with your government, and the public services that they provide you? If it is a requirement on the citizen to interact in this way with their government (because it makes government more efficient) or if it gives you advantages over your fellow citizens who do not have access, then does the government have the obligation to ensure that equality of access is available to all?

If the Broadband Dividend is significant, it suggests that countries need to ensure ubiquity of access within their territories to level the playing field for their citizens and maximise the use of scarce land & property resources. For business, high bandwidth might give the country a competitive edge with their neighbours so it may not be enough to simply ensure ubiquitous coverage - ubiquitous high speed coverage may be required. Is this a recipe for success in the global market economy? Or a lavish white elephant like the Millennium Dome?

Some Reference Points
The Central Development Corporation states that for Canada at least, the Broadband Dividend is CA$ 75bn annually (£36bn) or CA$ 2,500 (£1,200) per citizen. There seems to be no other source for that number, but if nothing else it's a stake in the ground.

When the Korean government undertook their thought leading intervention in 2004, they estimated that their project would add US$ 225bn of economic value over 10 years and lead to the creation of 820,000 jobs. Clearly, this is not a zero-sum game in their view... I wonder how much of this saving came from a reduction is the cost of the clergy?

Citynet quotes a study by the Allen Consulting Group in Brisbane, Australia into the value of broadband there, but it all seems a little woolly. Another stake in the ground, if nothing else.

Intangibles
What is a country's Broadband Dividend except a wild guess anyway? Measuring the impact has not yet started because we do not understand where all the benefits, and costs, of internet access are. Consider some of the contributing factors to an answer, and how little of these benefits will ever accrue back to the commercial entity making the investment in the infrastructure that makes all this possible.

Last week BBC Newsnight ran a feature on rural communities which included a piece on a Dipsticks Research. They employ around 30 people and are based on an old farm in Northumberland (far, far away from some of their competitors in Central London). "Emmerdale with Laptops", they said. Certainly, what they do is not possible without broadband.

Such outward migration of the population - away from the cities but still "connected" by broadband - can save companies and employees huge sums of money in rents and other costs and it leaves some of the benefit as new money into the host communities. This benefit might just be the occasional £50 for a tank of petrol at the local station or an employee or two deciding to relocate closer to work - increasing house prices - but all of it increases the wealth in general of the host community.

For centuries, populations have migrated towards the cities and the coastal regions (see this map of population density), driving property prices in those areas skywards. While this has driven growth in those cities, it has left great chunks of viable land severely under-utilised simply because people living there have the economic power of an ant. If that space can now be used by people to live in without compromising their employment prospects, we might be able to host larger populations - with the associated growth in the economy as a whole.

Consider also the ongoing change to working patterns, in particular, to the regular place of work. Broadband does not eliminate travel, but it can significantly reduce it: "In spring 2005 there were around 3.1 million people in the UK who worked mainly in their own home, or in different places using home as a base", according to the ONS. This was up from 2.3m in 1997, saving ever more time that would otherwise be wasted commuting. The economic and environmental impact of broadband driven reductions in travel could be very significant, but we do not understand the question let alone the answer. Don't forget the benefit to those that remain in the city - one less person trying to squeeze on the Tube in the morning...

Over and above the impact on travel, there is a positive impact on innovation and entrepreneurialism. Starting a business from an office with fixed costs from day 1 can break a business plan. Now of course, it is possible to run many businesses from home just as effectively as from the centre of a large metropolis. 62% of those home workers in the ONS data are self-employed and while many of them may make only a marginal contribution to the economy there are of course diamonds hidden in the rock that could make a big difference, especially in knowledge based sectors.

The End
I could go on working through the various areas where broadband can have a fundamental economic impact on a citizen or on a country, but like everyone else's attempts, it would be partially complete. Solving this question will take some big brains a lot of time (and money). My aim in this post is to get some thoughts going because as Confucius said "a walk of a thousand miles begins with a single step".

Labels: digital divide, FTTH, Google, next generation networks, Ofcom

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"What Joost is - a ... high quality ad-supported ... secure ... cost-effective delivery platform." Mike Volpi, officially now the new Joost CEO.

The edit is mine (you can read the full interview at GigaOM), but Volpi seems very clear that they are a platform for content owners first and foremost.

Since I first tried the service, I have held a certain amount of scepticism about whether Joost is really the consumer-play that some might believe it to be (like Skype, is it the centre of the experience?) My scepticism surrounds the fact that although you "buy" Joost, and you see the Joost interface, Joost is not really why you are there. You are there for the content. Unlike how you Google a word or you Skype someone, you don't Joost a TV programme.

Janus Fris on his blog, describes Joost as meaning "great quality Internet TV". That was back in January, when the Venice Project became Joost, so perhaps this evolution towards a service provider model shows how they have refined the concept over the last 6 months since its early Beta testing days.

The big success of these tests has been the P2P network by all accounts. I have seen this in the improvements between the two snapshots I have taken of their peer hit ratios (in April and then about 6 weeks later in May). My tests suggest that between 5 and 10 peers is enough (at current resolutions, which are poor) to take the load off the Joost Level3 hosted servers. In other words, it won't be long before the bulk of distributed content is an optional (performance enhancing) cost to the company.

I wonder whether Joost is actually more of a technology-play (the Intel inside model or even operating behind the scenes as the internet equivalent of SES Astra and Eutalsat birds to deliver Sky TV and others)?

Those comments from Volpi increase my suspicion that Joost sees itself as the latter, but is hedging its bets and getting itself off the ground by acting as the former. Perhaps Volpis experience at Cisco is telling also: "Most recently, he headed the company's $11 billion division that builds network equipment for telecom companies and network providers", Total Telecom.

Is the company going to take on Sky as a multi-channel "channel" or will it link up with the Murdochs as a delivery partner for Sky Sports? The comment from Volpi on Apple TV (a tie up that I think would be a mutually beneficial move), seems to indicate that Joost might well be preparing itself to act as the aggregator network and not the retailer.

In that position in the market, Volpi's background with Service Providers might again be highly relevant. He is better placed than most to diplomatically (and technically) solve network bandwidth issues by working with the major networks to minimise traffic tromboning. He knows network providers and he knows networks. He was at Cisco...

By controlling the distribution platform, Joost is in prime position to adopt the responsibility to aggregate and target the adverts to individual users. Joost will know far more about each of its users' preferences than will a dumb broadcaster (without the internet uplink), so they will inevitably be able to get more £s per user per second of airtime than would Sky or others. For sure, the content-co will get a large share of revenue and may even get more than they do today because the ad value will be so much higher.

Two words for anyone who thinks that being a wholesale platform is a low margin business: Bill Gates. Is Joost an application or is it a potentially ubiquitous operating system...?

Labels: IPTV advertising, Joost, next generation networks, targeted ads

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Joost is a hot topic. It deserves to be. There are many things about the service that aren't quite right, but underlying it all are three key ingredients for success: big-name backing, excellent PR and efficient, adaptable technology.

Of course they have issues. The project has spent less than a year in the public eye and there remain three other factors threatening the success of the venture: programming, devices and networks.

The programming is not right somehow - perhaps they need to consider adding "broadcast channels" because finding what you want from a static list seems to ensure the content gets stuck in time. The first time you go there, you find one or two things of interest, but when you go back you are left trawling somewhat. It makes the whole experience too predictable.

But, the backing is in place to fix these problems. The number of content producers is already impressive, even if their offering isn't. No-one is putting their best stuff up there yet - it's early days. Viacom own Dreamworks, who produce a large chunk of the most popular kids movies. If you have kids, what price an online archive of all Dreamworks films, on tap? Its not there, yet.

Before that happens, something needs to be done with the channel guide to give it a bit more life. It is surprising that there aren't more "social networking" buttons. If it were easy to rate content, you could be sure that there would be more turnover and better filtering of the good stuff. Make it less miss and miss.

This can all be done. A bit further down the line though, they are going to have to face up to the device question, which is to some degree, out of their hands. I don't know that Joost are betting on the PC being the dominant, always on device in the home, but if they are, then they may be swimming against the tide. Everything is a computer now, there are processors in everything. This will surely mean that specialisation wins over generalisation - TVs do video and HiFis do music. PCs do publishing. Multi-purpose devices are for mobile users who have a premium on weight.

But this is where the PR can help. Here, even the screw-ups are working for them. Colmmacc posted a link to a set of slides he had produced on the network architecture on my last post on that subject. I hope he didn't get into trouble for this because it turns out that hidden beneath the visible layer on the PDF was a whole host of info on Joost's 3 month strategy goals.

This leak, just serves to increase the buzz about potential partners and shows that the team knows what they are doing. An example is the combination of US Soccer and Real Madrid as launch partners, showing a clear appreciation of the David Beckham PR phenomenon that is about to hit the US. It has been suggested that this leak was a Machiavellian PR exercise, which is almost certainly not true, but it shows how highly regarded "The World's Hottest Start-up" is that people are willing to believe that this may be part of the plan.

I just hope that this doesn't cause the company to clam up, because a big part of what is making the PR work is the open approach of the team. Openness always makes you more vulnerable to leaks of "sensitive information", but it also allows you to get on with stuff and build partnerships. The reverse is also true - if you are afraid of giving the game away, you don't give partners enough to make them want to join you in your adventure.

The PR is the way that Joost can solve the device problem they face. Just as Skype became the must-have bolt on to cheap IP phones, it is quite possible that a Joost installation could become standard on the television itself, requiring just an ethernet or wireless uplink before it is ready to go. Of course, a set top box could do that job too in the interim period. At this point, the platform becomes a de-facto standard for online video distribution, with anyone and everyone as possible paying customers.

Joost: YouTube for Professionals.

I can't see Sky liking that very much, but it gives Virgin, the BBC, ITV, C4 and the other content owners and distributors a way around Sky's possible IPTV content / network monopoly.

Which brings me onto the network, which is growing on the back of version 0.10's For Friends offering. It seems that there is quite a bit more content added and a few tweaks here and there, but the programming remains as was. The main development is that there is a lot more advertising with discrete logo hyperlinks displayed throughout whatever you are watching.

The P2P hit rate that they seem to be getting is certainly improved over my earlier analysis, at least for the popular items. Level3 seems to be taking full responsibility now for the seed network, there is little or nothing now from the Infonet Luxembourg centre that there was a few weeks back.

On the "Most Popular" clip of dudes surfing in Hawaii, only 18% of the traffic came from Level3, and there was a broad distribution of 8 peers who between them delivered a further 74% of traffic. 66 other peers gave me the remaining 8% of bytes. When I did the same, while watching Rockie + Bullwinkle (not the most popular...), I found that there was only one peer hit, delivering 15% of bytes, but leaving 81% to the Level3 network. Only 4% of bytes came from the remaining 56 peers in that sample.

There is no crunch point yet, but if traffic does grow (still an if, given the programming issues), changes need to be made to the way in which Joost works with the networks to route the packets more efficiently. The huge amount of tromboning that currently takes place needs to be addressed by the networks as well as by Joost (this is a link to colmmacc's slides minus the "secrets").

Joost's card in this gambit is its efficient, adaptable technology. Used in the right way within a network, it offers an extremely powerful publishing platform offering the ISPs using it a potential differential advantage. That level of integration is very hard to do however (for the ISP more than for Joost, I suspect) for an ISP fighting a price war. Joost may have to wait a little before going down this road.

Alternatively, they could launch a guerrilla war against the networks. Of course they'll say that they won't, but it might not hurt the service providers to think that a possibility. Joost could entirely disintermediate the network from the video value chain.

But like I say, all this talk of global domination is a few years away, and it will not happen until Joost addresses the core programming and makes the service something you watch, rather than something you play with (as you do today). Toys get boring after a while.

Labels: IPTV advertising, Joost, next generation networks, video on demand

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Keith McMahon's excellent piece this morning, challenging BT's decision to return £2.5bn to shareholders offers a detailed view of how the deployment of FTTH could be made to work commercially in the UK. It's enough to make you ask, why not?

Without any inside knowledge of BTs decision making process, I'm guessing, but I suggest that perhaps a combination of competition from embedded technologies, muted demand and regulated returns might explain BTs stace. It also seems unlikley that this stance is going to change any time soon judging by the following statement taken from the summary: "Capital expenditure for the full year amounted to £3.2 billion and is expected to remain at that level for 2007/08 before trending down towards the end of the decade."

The trending down is clearly expected as investment in 21CN scales back as the roll out nears its goals. If BT were thinking that they would then start channeling their capital budged into further upgrade programmes like FTTx, would they be making such statement to shareholders now?

I doubt it. BT look to be trying to play the straight man, juxtaposing their position with those of their competitors. BT is clearly in the process of consolidating its financial position, building on the recovery from their near-death experience of a few years ago. The company paid £520m to cover a defficiency in its pension contributions in the year just gone and the £2.5bn buyback in this coming two years is clearly a message to investors that the company is not a cash black-hole (unlike some of its challengers...)

The message says that when they do invest, the do so prudently and with a view to investors making a return. This is an old fashioned business strategy, but one that has been proven to work!

So, looking at the specific reasons for the caution, starting with competition from embedded technology. Keith's post points out that the main upside from FTTH would be the addition of a broadband video pipe - everything else that the fibre can do, could also be done with the existing network without need for any more investment.

As a result, the incremental FTTH investment has to be paid for by additional revenues from video services. The word additional is very important, the total sum paid by consumer has to go up to pay the additional investment. The suggestion Keith makes is that if every home pays £4 a month more, we can all have it.

Which flows nicely into the second point: muted demand. Even the video pipe has an alternative, albeit one that is not quite as fancy: its called broadcast. How many broadband subscribers would pay that £4 more for a souped up version of free to air? For a service with many usability issues that have yet to be resolved? Consumers will have a choice: they don't need the service. They will only go for it if they want it, so we are not talking about monopoly returns. We are in fact talking about a very, very slow ramp.

A follow up post shows BT with just under 64% of the broadband market through retail + wholesale (the other 36% is Cable & LLU). Spread over 64% of the market instead of 100%, that £4 becomes £6.25, but that assumes all of BTs wholesale + retail punters taking the video pipe and paying the £6.25, which they won't as not everyone will see the value. That might limit demand even further, so you might be looking at 20% uptake, which would mean a £31.25 premium per month for a distribution service to compete with Freeview. Hmm... you can see the problem.

It's worth asking; is there any price increase at all that can be supported in this market? How can BT increase prices while ensuring that not only do they keep existing customers, but that they also win back the market share held with Virgin, the WLR and LLU players? In the past, every upgrade has left the consumer paying the same or less and just getting more for their money. There is no precedent for getting investments returned by a straight price increase.

Maybe the business case is made by the cost savings as suggested by Verizon and the 90% gross margin suggested by Iliad? I have a problem with this on a number of levels: financially, the problem is that the headline hides the fact that gross margin is already expected to be 60% on LLU. So, you are only looking at a €10 per month uplift to pay your incremental capex bill of €850 per home. 7 year paybacks on any investment is a hard sell in any industry, let alone in telecoms, by a regulated monopoly, in a market in which so much can change (and become cheaper) in 7 years. 7 years ago spending billions on flat rate dial up infrastructure seemed like a good idea...

The third barrier is the regulated returns of 10%. Remember that the money (because it is owned by the company), is owned by the investors. Those same investors can pretty easily get 10% or better returns elsewhere, much quicker and probably without anywhere near the same level of uncertainty and risk (the risk that consumers will stick to broadcast). If they are taking a risk in the open market, leverage means that their potential returns could be much higher than 10%. For such a big punt, you've got to be looking at a potential upside far greater than that.

So in my view we won't see FTTx in any meaningful scale until some way through the next decade, which means we probably won't see the benefits (if there are any) until the decade after that. Which is fair enough in my view if you are the one who has to pay for it all.

Labels: BT, FTTH, next generation networks, share buy back

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