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2007-11-05T17:17:00.000Z

O2 is predicting that they will sell up to 200,000 iPhones over Christmas and the New Year here in the UK. On the face of it, that is quite an astonishing claim, but please folks, bear in mind this is telecoms where the words "up to" are very, very important.

Let me also make a prediction
Prices will fall after Christmas.

You would have to be a millionaire to afford the launch prices! There are approximately 450,000 millionaires in this country, and that may be where the 200,000 sales number is driven from? Perhaps that many people are insensitive to price and just want an iPhone to brag about? I don't know...

Chrsitmas is of course a big factor in all this. Apple have historically sold 45% to 55% of a year's total iPods (by volume) in the October to December quarter and Christmas is when people are most prone to irrational exuberance. Of course, skimming the market is a standard entry strategy which Apple used it in the US iPhone launch where they cut the price after just two months.

£900
But you have to wonder how many people are going to treat themselves (or someone else) with a present worth upwards of £899 over 18 months. Let me simplify that - £50 a month, for a phone and a contract giving you 200 mins and 200 texts.

If you get an iPhone for Christmas, smile sweetly and say thank you, but do please ask whether the £35+ a month bill is also covered. It may not be very diplomatic but it's kinda' important so as not to wake up with a big hangover on New Year's Day.

For £30 a month you can get a FREE Nokia N95 with 400 mins and 500 texts, although whether the shop would open specially for you to get one on a Friday evening is debatable. Perhaps the iPhone is marketed to the strong silent type? Or to Billy-No-Mates with no-one to call?

Now, the N95 may not be "The iPhone", but it is £359 cheaper, and gives you twice as much talktime and up to 5,400 more texts included in the price. Ladies and gentlemen, Friday truly sees the launch of a premium product.

Are we going to buy it?
I know all the sceptics in the US had their words forced straight back down their throats and those same people have had to endure an even smugger than usual Steve Jobs announcing stupendous financial results for the Apple group. It would be a fool who says that it won't happen here...

It won't happen here.

Is that the headstrong non-conformist in me? Or even the intractable recalcitrant? (Don't worry, my mother called me worse...) Maybe it is. After all, I am not putting any money on my views. I can write what I like and the worst that can happen is that I get tagged as yet another false prophet of doom predicting the premature death of the next big thing.

Perhaps I had better explain myself
Firstly, and by way of qualification, I am not saying that the iPhone will never catch on. I am saying that it won't catch on at these prices. The iPhone is going to be able to carry a price premium over the competition, and a substantial one at that, but maybe 15-25% is what I have in mind. I'm going to play a little game here:

Let's just say a minute has a nominal value of 1 groat and a text the same. On that basis, the above N95 package is worth 900 groats a month, the iPhone contract 400 groats. Over the course of an 18 month contract, the N95 costs £540, the iPhone £899. Correcting for price and minutes/texts the iPhone carries an astonishing 275% premium over the Nokia N95. Ok, so I haven't taken into account the WiFi and Unlimited Data or any under usage of the fatter N95 plans, but this is a blog and not an analyst's research note so you get the picture.

Money Up Front
Factor number 2 in my sceptical forecast is the £269 up front charge. Without any real evidence to back this up, I believe there is a cultural ocean between American consumers and Brits when it comes to paying up front. Even discounting the Scots among us, we are a tight fisted bunch - witness how popular Free Internet has been here. It might look nice and have a fancy touch screen, but TWO HUNDRED AND SEVENTY QUID? You're having a laugh, mate. We like to spread the cost, hence the mountain of credit card and mortgage debt here...

Finally, factor number three (again it is price based like the first two). We don't like a superiority complex, and although we may secretly covet premium brands, if they are out of reach - particularly because of perceived greed - social envy can quickly turn "yuppie" into an insult. There is a delicate balancing act here for Apple to create aspiration and not kill it by stretching it too far.

So what is the conclusion?
Firstly, if you want an iPhone and don't want to look like a yuppie, wait until the prices come down. Secondly, don't bet on anything like the success in America being repeated here but thirdly, don't think that an inability to hit volume targets is necessarily a bad thing for Apple.

The iPhone is not a volume play and it's value is at least in part attributable to it's niche positioning. This will change in time as it becomes more affordable but by then the value will have been enhanced by the period during which the majority could only enviously disparage the lucky few.

Jobs and co know what they are doing. They have their partners where they want them to the point that you have to wonder whether it will really be Apple that funds the price cuts when they do come. You see, their interests are not necessarily in line...

Apple makes more selling 250 thousand iPhones at 4 times cost (250 x 3C) than they do by selling half a million at twice cost (500 x C). On the other side O2 make more simply by pumping more units because their costs are largely sunk in the network.

200,000 units would be an almighty achievement for O2 over the seven and a bit weeks between launch and New Year's Day. It took 10 weeks to sell 1 million in the US, a country with a GDP 5.6 times greater than the UK. Two hundred thousand does sound a bit like wishful thinking, particularly with the added uncertainty in the market of the Google (Software Stack on a) Phone... My guess? 65,242, but what do I know.

A False Sense of Certainty

2007-10-30T16:29:00.000Z

Uncertainty is the biggest barrier to investment.

Of course, we cannot eliminate uncertainty altogether, so we rely on "experts" to help us measure it - is a risk really a RISK or is it just a risk? When experts agree, we start to relax because we compound the weight of their opinion - that many experts cannot be wrong!

Furthermore, we assign greater weight to those that agree with us than we do to those who don't... It is human nature - the herd mentality that you see so much of in today's social networks - the result is that you get a WikiMyth or even an urban legend.

The Thought Process
The problem with our method is that we don't know whether experts are primary or secondary sources. Are they truly original thinkers who have put all the pieces together themselves, considered diverse views with an open mind and arrived at a point of view? Are they still open to alternative views, even after they have built a position and presented it to the world as their truth? Or are they people who have picked up a theme and then massaged all the evidence to fit what they are comfortable with and conveniently ignore the stuff that doesn't fit?

Both types can be horribly wrong in their conclusions, but when primary sources are debunked, they have nowhere to hide. For every Nostradamus there are probably a hundred David Ickes. History reflects very differently on those two "prophets".

When it all goes wrong for secondary sources, they can often be found comforting themselves with the blanket that they were (after all) just following the crowd. Where do you see yourself?

The more time you give yourself for the uncertainty to fade, the better your conclusions. The flip side of this in business is of course that the more time you give yourself, the more time you give your competitors. If you want the first mover advantage, you need to evaluate the risks and take a position. You have to be prepared to be wrong.

So what on earth does this have to do with Telco...?
I am of course referring to the bombshell that was delivered about a week ago by Dr John Papandriopoulos, where he claims a solution that will deliver 250Mbps over copper wires. If this is true, it puts a whole new perspective on the need to lay fibre to the home. Why would you, if you can get the same speeds on existing copper?

Just as we were beginning to believe that FTTH was the only way to give homes 100Mbps access - the consensus of the herd - some bright spark comes along and delivers a whopping great "what-if?" Hold your horses...?

Uncertainty is the biggest barrier to investment, and this new dynamic adds a whole new wave of it to the investment case. Is this real? Does it work? What does it really mean...?

What is this all about?
Let me try and pick this apart a little. Is it real? In theory, I think we can be pretty sure that it is. Firstly, VDSL2 is theoretically capable of 250Mbps already.

Source - Infineon

Secondly, Dr John is/was a student at a well respected university, who awarded him the Chancellor's Prize for his work and whose own venture fund is funding the turning of theory into reality.

It is worth noting that the thesis containing the theory was published in 2006, over a year ago, so they have time to scratch the surface. The fact that the uni itself is backing it to the hilt - there are no other venture partners - is a sure sign that this is real.

What happens next?
The question of who owns the Intellectual Property is very interesting; it seems that Melbourne Ventures are the contacts for now and that might suggest that the University owns the rights to the invention, particularly given the contribution of tutors who are paid employees of the organisation.

The University has an IP policy which deals with this issue up front, which John will have known about but I hope he got a good deal on royalties as the inventor... It could be the copper equivalent of finding the cure for cancer and even if it did get him a job at ASSIA where no doubt he will be highly valued, he may never come close to another breakthrough like this. Let's hope this doesn't leave a bitter taste.

Does it work?
Here we can be a little less certain. Yes, the formulas certainly work and yes, it almost certainly works in the lab - that is what unis do best. Will it work in the wild? Maybe? Probably? Almost certainly...? I don't think we will know for sure until the patent is awarded, the theory is embedded in equipment and users trials in significant volumes start.

This all needs time and depending on who you are, this delay will play very differently. If you are an incumbent that owns the copper, then it might make sense to wait and see a little. If you are a competitive carrier considering a fibre build, then perhaps it gives you a window of opportunity while the incumbent you are competing with is wracked by uncertainty. Uncertainty is an opportunity as well of course...

One situation it doesn't change is new builds, where there is a choice that must be made between laying new fibre or new copper. There, the only decision is to go with new fibre a) because its performance is known and b) because it doesn't cost you more (and some argue costs you a lot less to maintain).

But what does it all really mean?
Dr John is moving to the US now and leaving his beloved Australia behind. Quite what his role at ASSIA Inc will be, is unknown, but the company's chairman is Stanford Professor John Cioffi who said last year in an article for The Online Reporter "The main obstacle for the advancement of DSL technology is the interference ('crosstalk') generated from different DSL lines that share the same telephone cable binder," This was published just over a year ago - long before last week's developments.

Looking underneath the headlines, the claim is as follows:

"Two main factors limit DSL speed: long line lengths and crosstalk interference ... Our technology ... aims to manage this crosstalk interference, consequently allowing telecommunication providers to maximize the data-rates of their networks. We can do this dynamically, and adaptively, to try and get the "best compromise" of interference between neighboring lines to maximize performance."

It manages crosstalk. It does not eliminate crosstalk, although it is dynamic meaning that it copes on the fly with variations. What does this mean in reality? I am uncertain.

Is this what we have been waiting for? It maximises the data rates of their networks... at least until an even brighter spark comes along and increases the maximum theoretical speed of copper beyond VDSL2's 250Mbps. Impossible? How can you be so certain...? What about IPSL from Rim Semiconductor's 384Mbps over copper (field trials coming shortly) or further developments from Cioffi's group that could deliver 1-2Gbps on copper. Is it real? Does it work? What does it mean...?

Is copper a bottomless pit?
The steps being claimed are still very large and that leads me to believe that actually, it may be while before we reach the point of technology delivering diminishing returns. Of course your fibre investment is future proof to some degree, but as sure as eggs are eggs, rolling it out will get cheaper the longer you wait.

"According to Japan’s incumbent, NTT East industrial FTTH deployment costs have come down from USD 5,400 per subscriber (including construction and equipment) in 2002 to just under USD 900 in 2006. It is forecasted that costs could fall to USD 650 in 2009." according to Finnie, G. (2007), FTTH Worldwide Market & Technology Forecast, 2006-2011, sourced via Katja Mueller's report on FTTH in the UK.

Getting more out of copper gives the bridge that you need to wait. Of course, you cannot wait indefinitely though - unless of course you are a monopoly that is immune to political pressure. If I had to take a position now, it would be to roll fibre to the cabinet but not to the home. Why?

It seems that in spite of all the advances, there is one constant. Speed over copper degrades with distance. That is true of VDSL2 and even IPSL, and of course we know it is true of ADSL and ADSL2+. I have written to both Melbourne Ventures and Rim Semiconductor asking them what their inventions deliver over longer lines which I will update you with when I hear more, but at the moment we are where we were - shorter lines = faster speeds. And, we have a lot of long lines in the UK.

Going the whole hog
There is another viewpoint though. I have heard it claimed (for example by Angus Flett, Director of Product Management at BT Wholesale) that "If you do VDSL2 ... then you have to do fibre to the cabinet, and if you do that then the economics mean you might as well do fibre to the home."

Intuitively, I'm not sure I buy that and I have seen data comparing the two that doesn't back that statement up either, with an order of magnitude of around 1.75 to 2 x differentiating the cheaper option of stopping at the cabinet and using xDSL from there.

But there are other factors like maintenance cost. I heard an eminent technologist say recently that if BT ditched its copper and went for an all fibre network, it could also ditch around 100,000 staff which would deliver the ROI in a flash - even with BT's very generous redundancy packages.

There have been some very well researched studies by thought leaders who also argue that FTTH is a commercial slam dunk. Perhaps all that BT is waiting for is for Ofcom to give them a greater return guarantee before they take the plunge?

Honestly though, have we really thought this through?
There seems to be a heightened sense of certainty that FTTH is the answer, to the point that some people have actually forgotten what the question is. If the question is "how do we spend £25bn", then yes it probably is the right answer.

One of the most admirable statements I heard at Telco 2.0 recently was Steve Robertson, CEO Openreach stating that they will only do FTTH if and when they can do so ubiquitously and still make money. No digital divide, not £10bn for 90% coverage, not $10bn for 75% coverage. 100%? Probably not in reality, but 99.6%?

But even so, what is the question? Are we trying to deliver more gigabytes? Or gigabits per second? We use around 1% of the installed local loop's gigabyte capacity and yet we demand upgrades. For sure gigabit per second capacity is subject to congestion, but there are different ways to address that. One is of course to build faster pipes, the other is to spread the usage better on existing pipes. Which would be cheaper...?

So, what if...?
What if Dr John Papandriopoulos' invention, or Rim Semiconductor's IPSL, or ASSIA's future wave of Cioffi inspired technologies really can deliver what they promise? Does the fibre case still stack up? Especially if we can buy time by learning to use the 1% of capacity we use today more efficiently by looking again at the relative importance of speed versus storage.

The more I look at this issue, the more I see false certainty in the conclusion that the FTTH lobby has reached. Is is not the only answer to the demands of 21st century computing, even when that phrase is taken in its widest possible context to also include the complete replacement of 20th century broadcast networks which is another case that for me is not proven.

But, as I said earlier, business cannot wait for certainty. All it can do is take the best advice on board and judge the relative value of doing something against doing nothing. Doing nothing is a valid strategic move, remember, especially for monopolies.

One final what if for you to consider... Copper is not dead, that we can be certain of. What if the regulator made the following offer to BT: you can build fibre and charge what you like for it, but in return you must divest the copper network including IRUs on the physical premises and backhaul.

If you were BT, what would you do? If you were Virgin Media would you buy it? Sky, Carphone Warehouse...? What does that tell you about your real position on FTTH?

The Two Headed Beast

2007-10-22T14:40:00.000+01:00

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Luddites

2007-10-19T14:53:00.000+01:00

It has been decided. Your use of telco services can be tracked, built into a profile and used to advertise to you. Everywhere you go on the internet and everywhere you take your mobile phone is data that operators can use to make money from you. It has been decided...

Sorry?

I am not a fundamentalist!
Regular readers will know that I am not a privacy nut. I don't believe in the stupid network, although I met its author David Isenberg over lunch on Tuesday at Telco 2.0 and found him to be a thoroughly absorbing, intelligent and genuinely nice fellow.

I was telling David how I think telcos can justifiably help the modern applications like Facebook, MySpace and WorldPay police the use of their services. My goal in such a theory is to protect legitimate users from sex pests, fraudsters and impostors - as outlined in my article on The Big Stick that telcos could use to "encourage" the adoption of their platform models.

Careering Down the Slippery Slope
Of course the problem is that with great power comes great responsibility. Little did I know that less than 3 hours after David and I parted, I would hear a presentation where this great responsibility has been totally ignored. This was not quite quite a slippery slope - it was more a slippery cliff edge.

The presenter detailed how his DPI equipment has been installed by a client for whom they log 36,000 events per second - today. They log everything that you do... I was left speechless, which was nothing compared to how I felt when another panelist brazenly stated that the privacy debate had happened already and that we had moved on.

By this point I was angry: this debate may have happened in a room full of personalised marketing specialists, but it has not involved Joe Public. To dismiss my concerns on the basis that I'm too late to have an opinion fundamentally misses the point that the user has been kept in the dark and the goalposts are moving rapidly as the capacity of technology to inspect, store and process increases.

It is like saying "it's rained enough", we'll have no more rain ever again on earth because Bangladesh is flooded.

False Justification
Apparently eight paedophiles in Italy have been arrested because of this vendor's DPI - tracked for sending MMS of abuse. No complaints here on that: this comes into the acceptable area as far as I am concerned, but the implication was that because the technology could do this amount of good, everything else they do was also permissible.

Sorry?

There is an ethical chasm between using DPI to address the evils that the internet has made possible, and using it to make money. For sure, there will always be a grey area, but what I heard was so dark that if right minded individuals heard it, they would recognise this as black.

Fobbing You Off
The data is not personally identifiable was another riposte. I disagree. There has to be a primary key and if all the data is being collected to develop adverts targeted at me, I don't think it matters whether they know me as Jeremy Penston, jpenston at ipdev dot net, 07733101607 or 82.69.75.210. The chances are that the database contains the lot anyway because most of it is in my email signature which will be read by the DPI every time I send and receive. If they couldn't identify me in some way, they couldn't target me - it doesn't matter what they call me, I'm still me.

My problem is not the targeting of adverts, it is the collection, storage and unknown manipulation of my profile in secret. Anyone who believes this is ok, I challenge you to go and talk to five of your friends (who don't work in telco) and tell them exactly how much is collected and why. If you can do so without feeling ashamed of what you believe in, then so be it, but I guarantee that most people in the street think that this only goes on in the NSA, MI5, Mossad and the FSB.

Perhaps your more clued up friends will know that Google could also be included in the above list but what the Big G sees of your usage is trivial compared to what your phone company does. At least until Google becomes a phone company...

Playing the Game the Right Way
Let me be practical. If you want to target adverts at me, then tell me what you are doing. Ask me permission at the time of use and give me something in return. Do not assume that because I told you where I live so that you can bill me, you can sell that same data to direct marketeers. Do not assume that because you know I just landed at Malaga airport on holiday, that you can send me an advert for a hire car. And, do not assume that because I gave you permission to use that data once, that I will always give you that permission. Does that sound fair?

I may sound like a Luddite, but the vast majority of the population knows nothing of what goes on inside the network. All I ask is that we be told what you know about me, how you would like to use it and what I will get in return so that I can decide whether to let you, ask you to delete it or change the bits that I feel are wrong.

We may not be as consumed by the need to remain anonymous as we were when Orwell wrote his stroll in the park. Social networks are proof that people want to share their lives with each other, but it is very dangerous to assume that because I share my life with my friends, that strangers can eavesdrop and use what they pick up to get inside my head. Do not assume that this debate has happened because Joe Public really has no idea of what is going on. Remember, the longest drought often ends with the mother of all thunderstorms.

The Big Stick

2007-10-11T13:20:00.000+01:00

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

I suggest that this is a three stage process.

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

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

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

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

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

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

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

Cheaper, Safer - not Richer

2007-10-05T10:56:00.000+01:00

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

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

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

Facebook didn't need to.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Joost: Does Anyone Care Anymore?

2007-10-03T11:43:00.000+01:00

Joost went to full beta this week, something that was met with barely concealed scorn by the majority of commentators for whom the service is now very much yesterday's next big thing. Reading the 30 or so comments on TechCrunch is a window on how people perceive the initiative.

Arrington: "They really milked the notion of a “private beta” to the extreme. To the point where I sort of lost respect for them, actually."

Comment #3: "There’s no Joost buzz/hype left anymore. They’re old news"

Comment #8: "I was an early beta tester … well … sort of … played with the app for about 30 minutes three times and did not like it. Removed it from my laptop and never looked back."

Comment #9:"I tried to use this thing a few times and it never really grabbed my attention. I have not removed it but have not used it for months"

To be fair, these are balanced by the odd positive response, but nearly two thirds are saying that they tried it, didn't like it and won't be going back. This is a sample and a very unscientific one at that, but what is clear is that after the Peak of Inflated Expectation earlier this year, Joost is now sliding rapidly down the Trough of Disillusionment. Can they rise up the Slope of Enlightenment to the Plateau of Productivity...? I don't know.

What have they been doing over the summer?
It could be argued that the Joost team have been beavering away, doing the dirty work behind the scenes to lay the foundations for a solid future. Clearly, they have been adding content partners - Major League Baseball stands out as one that offers fresh, niche content (to non-US residents). They have also done a lot of work on the interface making that more attractive and are evolving their ability to add widgets and link with the rest of the web.

All of which is good - if you ignore the expectations that were set earlier this year.

Check off the new content partners with their three month goals laid out in the leaked document earlier this year. Hmm... ITV: no. BBC: no. C4: no. I could go on, but it could be a bit embarrassing. Sure they closed MLB, but they weren't even on the list and if ever there was a sport that the US struggled to export, baseball is it (sorry Cuba). Has Joost become a dumping ground for rights that cannot be sold onto satellite platforms?

For me however, the major disappointment is the continued lack of a linear TV offering. Perhaps I don't get the idea of on-demand and am stuck in a timewarp, but I see on-demand as a catchup service complementing linear TV, not a standalone offering. What do I want to watch today? Do I really need to think about it?

A pregnant pause?
I have not written on Joost since the summer because there has been very little to write about. It has been very, very quiet... Volpi came in as CEO and clearly circled the waggons in preparation for this week's launch. From where they were (open, exciting and fresh) the silence was all the more notable.

It is to be expected when a new person comes into any job that they will want to review where they are and where they are going but this always risks losing momentum. Especially when the new boss has some different ideas of his own. Is what we are seeing a sort of horrible compromise?

As I said at the time, Volpi clearly sees Joost as a platform: "What Joost is, is a ... high quality ad-supported ... secure ... cost-effective delivery platform." Not the TV station that the concept started out as and what consumers have been led to expect. It is this expectation that is now fuelling the disillusionment because you probably cannot have it both ways.

Where to next?
In the platform model, you are not the be all and end all: you are not the end product. What you are is the operating system; something that needs a set of more exciting products that run over your platform. In Joost's case this is content. In Microsoft's case, this is Office and IE.

Joost as a platform offers a bridge between the content community and the networks. We can see where they are with the content community, what we can't see is where they are with the networks. If a bridge is not anchored on both sides, it falls into the river. Is this happening to Joost?

It is too early to say. What we don't know is what they have up their sleeves. If they can get to a point in 6 months time where they have anchored the bridge with a network provider or two - offering much improved performance to an ISPs subscribers (HD perhaps) - then the content side will follow. That is what I am looking for and why I am not yet writing them off.

The unexploited asset
The ad platform offers a huge upside over broadcast if Joost is inside the ISP because the ads can be matched to the subscriber base and deliver much improved hit rates. If they spend the next 6 months incrementally adding content and bug fixing as they have over the summer, they may well fizzle out.

They have to create the virtuous circle or they will be caught in the crossfire between content and networks. They are probably reaching the point on the content side where they cannot go much further without addressing the other side of the loop. They still have time, but they no longer have the time to market advantage that they had a year ago when The Venice Project was initially announced.

In all, it has been a bad week for Niklas Zennstrom and Janus Friis. They may well have $530m more than they had at the start of it, but they have taken a beating on two fronts and their reputations have been damaged. Clearly they now have a bit more time on their hands to work on Joost...

This may be a good thing, it may not. Volpi has started down a path that is different from the one that Zennstrom and Friis foresaw when they came up with Joost as the son-of-Skype. It was expected that the duo would take-on the TV industry, but where they have found themselves is in a position where they have to work on the inside - supporting the needs of both content creator and network distributor. Are they all on the same page or is Volpi out on a limb? Only time will tell...

Platforms, Platforms Everywhere

2007-10-02T12:00:00.000+01:00

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

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

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

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

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

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

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

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

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

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

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

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

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

Back to Basics

2007-09-28T12:39:00.000+01:00

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.