Scaaaary

Happy Halloween. Suitably scary numbers from KPN's consumer fixed line division today: annualized line loss of 23.5% in Q3, a level nearly four times that of Q3 2005, with EBITDA margin down four percentage points from this time last year. A full 58% of net adds on DSL in the quarter were on Direct ADSL, i.e., the raw connectivity product (H1 was 45%). Hats off to KPN for giving the people what they want.

Three's company, five's a crowd

The ever-excellent Guy Kewney has a great post (read it before someone forces him to take it down), relating gossip that 3 UK has had some German visitors at its offices of late.

Small can be beautiful too

One of the many things I love about this whole decentralized media meltdown phenomenon is that it doesn't matter how specialized your focus, you can have a voice and find the audience relevant to you. The latest example is this excellent blog devoted to Latvian telecom. If you're into it, then here is the definitive site for you. Well done, Juris!

Expanding my carbon footprint

What is the carbon footprint of the global conference industry? It's probably about time we started thinking about it. I assume it must be horrendous, but I've been cycling to work religiously for the past 15 months, so hopefully that will go some way towards offsetting the damage I will do in flying to Berlin to appear once again during the pre-lunchtime comic relief spot at VON. Maybe it's time for the telecom conference industry to harness some of the productivity tools it has been touting for so long and go virtual?

R&D and value added 2006

The UK's Department of Trade and Industry has today published its update on R&D and value added by UK companies, which also includes a global league table. Interesting reading for the industry, methinks.

The winter of our discontent

Well, it's Monday, I turned 39 again today, I have just been given a pay rise so derisory that it will cost more in administrative costs than the actual value of the extra cash they're giving me (who ever said that a high ranking, unusual ideas and interesting CV should matter to a bureaucracy which focuses on page count?), and it looks like rain. Still, I guess it could be worse. I could be an O2 customer, like Mark Kubrick (any relation, I wonder?), who seems to be having a hell of a time.

UPDATE: When I see this, I think there must be spambots at work, or the system is being gamed in some other way. We don't have 798 employees in London.

Take a well-earned break

One of the few, actually very few, advantages of using Blogger is that occasionally this humble bloglet appears to end up in some sort of showcased rotation on Blogspot. I'm not sure how this is determined (probably something algorithmic!), but nevertheless it is interesting to observe where site visitors have come from sometimes. Today I had a visitor who came in having just visited this amazing site. Take a couple of minutes and enjoy these amazing photos of Iceland and Norway, plus there is some cool GPS-generated artwork, which you can always claim as your reason for visiting the site if your boss happens to be looking over your shoulder.

And another ten things...

A Palladium Class uber mega-value reader submits his own "Ten Things" list, based on his perceptions from life in the supplier space. It's a bit harsher than my take from the investor's point of view, but then again investors typically can be more selective in their exposure and don't rely entirely on telcos for their subsistence. Read it and weep.

"Conclusion: Sell the rat bastards (aka the carriers) what they want to buy, especially all this IMS crap...

WHY ?

1. The carriers don't know what the f*&k they are doing anyway (AT&T thinks one HDTV channel over ADSL2 is enough for America);
2. There is no more money in voice (how much was your long distance bill last month? If it was greater than $3, you're being taken);
3. There is no money in services (any 18 year-old in the Valley is a better new business development manager than any of the telcos have);
4. If NBC can't make any money in television why do the telcos believe they can?;
5. There is no money in transport (especially long haul);
6. There is little or no money in access (but let's spend $5-8K per new sub on FTTH, the carriers will just screw their stock holders later - bondholders please note);
7. There is little or no money left in mobility (it's all about the phone anyway);
8. The carriers' customers all hate them (no brand loyalty in telecom);
9. All their efforts at customer control (except political) have failed/will fail;
10. And even when they actually buy something they want us to finance it on our books!"
    

UPDATE: A Platinum Class mega-value reader writes in with the following observation:

"Reading this I could not help but think that this guy is extrapolating future telco by starting from present telco. I think future telco will be anything but an iteration/variation of present telco.

Witness Iliad and their 300k wifi hostpots that popped up overnight in France - it gave Iliad a national SIP-based mobile network (a nasty one, probably, but nonetheless a network).

Morph this into a larger Wimax version (Iliad has the only French license) and you could get an almost decent national mobile voice network. Best of all: access capex is done by the end user (sort of like Skype, whose 100+ million users are the voice switching infrastructure).

This probably means that for incumbents to survive, they need to change into something they are not right now (e.g. could a tier 2 voice operator suddenly become a global SIP operator, i.e. a better/new/improved Vonage)?"

Spot on, though my question remains, does "future telco" evolve out of the current incumbent morass, or does it happen from outside, as with Iliad? To use a mass extinction metaphor, do the dinosaurs evolve into creatures which can survive (birds), and/or is it the nimbler, more adaptable small mammals which inherit the earth?

UPDATE 2: Another mega-uber value reader, also from the supplier space, chimes in:

"Both the original author and the commenter are correct. Traditional telcos are approaching this as a red ocean problem - what can I do within my own walls, where as the Illiads are the relatively new comers with blue ocean strategies. The latter has a value prop that appeals to the user while the former appeals to the street. I don't see morphing as a likely outcome soon; so I'd just assume sell weapons to both sides."

Meeting Mexuar

I just got off the phone with Tim Panton, one half of Mexuar, a Manchester-based startup which is to release tomorrow an SDK for its new product, known as Corraleta, at Astricon in Dallas. This uses a Java applet of only around 120K in size, which can enable direct click-to-call over Asterisk to a website's contact center with no software download for the end-user, and presents the contact center agent with contextual information as to what the caller was doing in the site when the call was initiated. It's cool. Give it a whirl.

Roll on subscriber inertia!

Every time I start to feel a bit of broadband wanderlust, I go trawling around UK user forums to read the outpourings of frustration and distress of highly dissatisfied customers. I guess that makes me a sadist rather than a masochist. Apparently, masochists are easily identified by their subscription to a free broadband package - and by their all-consuming rage. So far, Charles Dunstone has stolen the limelight, with occasional cameo appearances by Orange, but it looks like Sky may be ready to give him a run for his money. If you've got some time on your hands, or are a Sky shareholder trying to assess how the company fits into the "end-user value" matrix, have a look through the tales of woe here, here, here, and here. Or, just take a short-cut to this site and note that the unhappiness threads outnumber happiness by nearly five to one.

Fiberania

My friend and long-time Palladium Club mega-uber value reader Dirk over in Amsterdam, also known as "Soulbrother Number 1" and the "Godfather of Fiber," has put together a labor of love summarizing fibrous developments in various parts of the world. If you're interested in these things, it's well-worth your time to read it. As they say in the FTTH industry, "Dig in!"

Leaky pipes

An awful lot of money has been put into the Dutch cable business lately by Cinven and Warburg Pincus, most recently the Essent transaction for EUR2.6bn. Given the fiber incursions from municipal governments, housing corporations, and Dik Wessels' phalanx of companies (as well as KPN's own plans), I have been somewhat taken aback by some of the per-subscriber valuations generated in these transactions. It will come as little comfort to the Dutch cable industry when, as predicted by the front page article in today's Trouw, the Dutch parliament votes later today to regulate cable on an equal basis with KPN - imposing an obligation to unbundle access for third party services, and, I assume, bringing in price controls.

UPDATE: The vote was unanimous, in favor, across all 14 parties!

Sluit FON aan

On Friday, I pointed to word of potential ISP deals for FON in the Netherlands, and noted the country manager's interesting comments that incumbents were proving to be not nearly as obstructive or hostile as had been expected. Today we find, again via Trouw, that the first deal to be signed is with none other than Speedlinq, an ISP acquired by KPN at the end of March. Though Speedlinq only has around 40,000 customers, it looks to me as though KPN may be testing the water with this, and indeed the article claims that talks are ongoing between FON and xs4all, another KPN brand with 264k broadband customers at the end of Q2. In my now near-infamous opening presentation at the Telco 2.0 event, I put forward KPN as another candidate for inclusion on the list of companies which seem to be in the process of "getting it" (iBasis being a case in point) and this would seem to be further support for that argument.

(PS, the title is a bad attempt at wordplay based on KPN's slogan, "Sluit je aan")

UPDATE: KPN is apparently denying there is anything to the story, but my sources say otherwise...

Foneros uber alles

Dubya seems to have gotten into a spot of bother with his Tet Offensive comment, but in EuroTelcoland there is an offensive of another kind taking place. Perhaps "offensive" is too strong a word for the Fonera Promise. Or perhaps it really depends on your point of view as an incumbent - is it a threat, or an opportunity? One of my apparently (and surprisingly) now near-legendary Ten Things list items was that investors may be concerned that incumbent footprint expansion has been physical rather than virtual, but maybe the message is getting through to some companies. In the Netherlands, Vincent Dekker at Trouw has an intriguing article on FON in the Dutch market. With 2,600 Dutch Foneros at present, FON's presence in the market is already greater than that of KPN, albeit I'm sure KPN has the high ground in terms of AP location (hotels, airports, etc) - at least for now. However, the really interesting part of the article is the statements from FON's Dutch country manager, who says that incumbents:

"...do not turn out to be the big adversaries that FON feared they would be... We are talking to several ISPs in The Netherlands. Now they can only give their subscribers internet access in The Netherlands, but with FON, their subscribers can go online all over the world."

Upping the ante

Just in literally seconds ago, French bad boys Iliad have acquired Paris metro-FTTH newcomer CiteFibre, a very sensible acquisition of assets and talent in light of the company's bigger goals.

UPDATE: Palladium Club uber-mega value reader alerts me to some very interesting background in French here (mirrored here).

Growing pains

I got the impression listening to Ken Ducatel from the EU a couple of weeks back at Telco 2.0 that the Commission considers the creation of Openreach to be a very significant development, and I got the vague sense that its evolution will have a bearing on the direction of structural separation as an avenue of exploration across the community. Given that as a background, I'm sure there will be interest in Brussels and elsewhere in this just-published report from OFCOM on assessing the impacts of the regulatory settlement one year on - progress, yes, but not plain sailing.

Telecom, heal thyself

I've recently stumbled across a couple of inbound links which point me to a couple of relatively new blogs which look promising - each written by Palladium Club charter member mega-uber value readers who are industry insiders - Dave in South Africa, living the life of an alternative carrier in an unsympathetic market, and Emilio in Spain, who among other things, pulls in the Iberian angle (check out the post on tiny Andorra's broadband aspirations) and the greater Spanish diaspora (how about internet access as a basic constitutional right in Chile?). Welcome to the party-gone-out-of-bounds, guys!

The future of telecoms regulation

A mega-uber value reader alerts me to an upcoming seminar on this very issue in the Netherlands, 2 - 3 November. It's invitation-only, but will be webcast live, though it's unclear to me if this includes Andrew Odlyzko's keynote in the evening - hopefully so. Top-notch speakers, dealing with tough issues, in a setting which is already a dramatic example of emerging changes in the landscape, egged on by EuroTelcoblog readers in the virtual Q&A process - a splendid time is guaranteed for all!

Uncommonly connected

One of the really good things about events like Telco 2.0TM is that you get to meet in person people you have previously just corresponded with or heard about. One such person is Lee Dryburgh, who's just started up a new site devoted to probing issues around how to facilitate relevant exchanges of information between strangers in a mobile environment. Thinking back to John Waclawsky's presentation at Telco 2.0, this is an issue with tremendous significance and potential, as well as a place where telcos might play a credible role if they grasp what is at stake.

Viva oxymorons

I cycle to work, so I am blissfully unaware of the torments of those reliant upon public transport. Just as well, I think, when I open up today's Guardian and see photos of a mobile disco flashmob organized at Liverpool Street Station on Wednesday. I do like the Web 2.0 disconnect inherent in this, however: it's a social event, but each person is dancing to their own music - connected and disconnected at the same time. Wonderful.

Costly innovation

Friday the 13th seems like an appropriate date for a company to oust a respected executive, and that's just what Vodafone has done. Just six months after Thomas Geitner was placed at the heart of Vodafone's new business and innovation effort, which it has ambitions of growing into 10% of group revenues by around 2010, he's catching the night train out of Newbury. Can't wait to see where he turns up next.

Absolutely Fabchannel

The true broadband dividend is already starting to pay out in Amsterdam, with Fabchannel (which I wrote about here) announcing a deal with V2 Records to allow Fabchannel to sell worldwide the videos of V2 artist concerts shot at Fabchannel venues (an idea partly suggested in my interview with founder Justin Kniest). Equally exciting is the revelation that Fabchannel is to test (on fiber customers) broadcasts using Flash at 5 - 10 Mbps, with Dolby surround sound. No wonder the folks at Glasvezelnet Amsterdam are already talking about a lot of enthusiasm building for the project, and potentially a faster deployment timescale.

UPDATE: I hear that Fabchannel is one of the content sources which has seen interest from the Venice Project.

Mind the gap

The OECD broadband stats for June are out. Interesting to note that many of the most highly penetrated markets are the very places where the most disruption is taking place from muni/utility/property/entrpreneurial fiber. If people were happy with the telco/MSO vision of what broadband is/could be, would this be happening?

MyInfomercial

People often ask me (actually, not that often), "James, what is the secret of your success, what is your personal philosophy of the world?" and I typically say something like, "Shit, I don't know," or "Sorry, did you say something just now?" That's probably one reason why I have never scaled the dizzy heights of the bulge bracket investment banking world. Now, thanks to this amazing video, I see the error of my ways - my CV is nine pages too short, and I haven't produced a video mission statement. I don't see why this guy is wasting time trying to get into UBS, he should go straight to cable!

What just a little bit of Googling can do for you

Total Telecom is reporting that Korea Telecom wants to launch an industry initiative called Telco 2.0. Given that the geniuses behind this are in R&D, it would seem natural to assume they would have done some research beforehand, namely Googling to see if anyone else was using the Telco 2.0 name. The answer, of course, is yes, and it's trademarked. And telcos wonder why they get bad press...

World turning

Lots of stuff happening today.

Glasvezelnet Amsterdam's official launch is happening today. I've got a lot of information, but am not sure what is coming out when, so will hold fire for now. The official site is here, including the first three service providers, though Labs2 has added some interesting 11th hour news to the mix by introducing Scandinavian service providers next year. Some pretty exciting stuff is happening around this, so more to come later.

Elsewhere, a little bird tells me that the Gizmo/Live Journal LJ Talk mashup goes live today, which is timely as I just included a section on this in my recent note to clients as well as in my Telco 2.0 presentation.

Cycling home last night, I heard some nauseatingly sycophantic coverage of the Carphone Warehouse/AOL deal on BBC Radio 4's PM, which went something like: "Well, okay, TalkTalk broadband has had a few hiccups getting started, and management hadn't anticipated the huge demand, but Charles Dunstone's a great entrepreneur..." I'm surprised that they didn't have "Land of Hope and Glory" playing in the background, because the tone was very much that we're lucky to have him, what a national asset, etc. Fairly sickening stuff. I'm sorry, but when you make a big media splash initially offering free broadband for life, you should expect significant interest - if your marketing department leads places where your systems can't follow, that's bad planning, not "overwhelming demand." I thought, surely someone out there is going to tell it like it is. Over to my cyberfreund Keith, who seems a bit miffed. Also, I guess one interpretation of Vodafone's decision to cut and run may be that the collateral reputational damage of association with CW is just too much to risk.

I had a call with the management of Fring today, and am looking forward to getting a review handset sometime next week.

UPDATE: Amsterdam has added another ISP, Teleturk, which has IPTV rights on a range of Turkish programming. Also, Pilmo, one of the first group of ISPs on the network, has revealed initial pricing: EUR44.95 per month for 10Mbps symmetrical connection, 250 minutes calling in the Netherlands, and 38 TV channels, reduced to EUR34.95 per month during the first year.

UPDATE 2: A longstanding Palladium Club mega-uber value reader, veteran of the UK mobile arena, writes in to observe that the Vodafone/Carphone deal is nothing to do with reputation, it's all about payback, a sentiment echoed in this very fine post from Keith (I'm very intrigued by his suspicion that Mr. Dunstone may opt to take the company private.).

Ten things, 2.1

One of the amazing things I have seen in writing this blog is that it's often the pieces you never suspect which generate huge interest. My previous Ten Things post got picked up yesterday by Brother Om, and then by CNN Money, as well as a lot of others. One thing I clearly observe is that the Om-derived traffic is a lot higher than that coming from CNN - ironic in light of the fact that Om used to work for a TimeWarner company... According to my traffic logs, I got dangerously close to 2,200 visits to the site yesterday (as opposed to the x-hundred people who subscribe to the RSS feeds), which is nearly six times my average daily traffic, and so far this morning I am already near the level of traffic I typically see in a day. So thanks to everyone for taking notice - I appreciate the interest.

However, I was a bit taken aback by the strength of the response and need to clarify a couple of points, just so I'm not misunderstood. I didn't write this as some sort of manifesto. It was really just intended, for those who weren't there, as a summary of my opening presentation at Telco 2.0, which itself was designed to take the audience out of their comfort zone, albeit in a humorous manner. The whole idea around the Telco 2.0 event was the theme of an "industry brainstorm," and I was trying to focus on issues which the industry needs to work through. As I made clear to the audience at the time, the list is a distillation of things I genuinely have heard investors complaining or worrying about (occasionally with a bit of help from me). I don't necessarily subscribe to every item in equal measure, nor did I intend to paint a picture of utter despair. Fundamentally, I guess the thing which surprised me most is that the reaction to the piece suggested that people somehow viewed this as something new. A lot of the issues have been stated in discreet and fragmented form by me and others for the past three years or so, i.e., the underlying message was there already, but maybe it was the fact that it was all synthesized together in one place that got people's attention. Not that I mind - there's no such thing as bad publicity.

Be that as it may, the other thing to make clear is that the "Ten Things" are not what I came away with from the event, they're what I took in. What I came away with was much more complex. I met some extremely bright and forward-looking people, many of whom seemed to be terribly frustrated by the constraints in which they work. So when I say that "telcos can't innovate," that's an investor perception based on what we see on the outside. Clearly there are innovative people on the inside, but they face challenges in being heard and getting buy-in from the organization as a whole. I can certainly relate. My own industry is being disrupted, and I have often tried to be heard internally on the issue of how we position ourselves to deal with it (for instance, suggesting that we sponsor Telco 2.0 - pigs will fly...), but the level of awareness in places where it matters is very low, and risk aversion is insurmountable. So if it looks like I am pointing the finger, it is partly from a similar position of personal frustration and organizational paralysis.

All that said, my final impressions of Telco 2.0 are as follows. It is clear that the industry as a whole, and the specific companies within it, seems to be polarizing into two camps (as Malcolm Matson cheekily illustrates here): one of which says, "We should stop fighting in the services arena, restructure ourselves around infrastructure and reappraise how we can derive value at the edge."; the other is intent on raising its game in services and genuinely believes there is value to be derived in doing so. I don't know how companies can be run coherently with such cognitive dissonance going on, probably even at the highest levels of management.

Then again, I guess this is just the sort of process which can generate change - the conflicting voices in the head of telecom will eventually have to lead to some sort of action. Alternatively, perhaps regulation (mandated structural separation) or investor demand (structural separation as a form of financial engineering to unlock value) will force the agenda to the surface. The "good news" in all of this, if you consider admitting yourself to rehab to be good news, is that the level of denial I picked up at Telco 2.0 was dramatically lower than what I have encountered in previous events. It genuinely seemed as if the attendees were striving for some sort of answer, attempting to grapple with some dilemmas which I'm sure they'd just as soon ignore. As proof of this, I note that, unlike many other events, the majority of speakers stayed around for the entire event, rather than taking the typical "Elvis has left the building" fast-track.

I had a meeting with a very smart client yesterday, who was fascinated by all the issues around industry transformation. His final question, a rhetorical one was: "In investing theory we should always be uncomfortable with the consensus view. The consensus view of telecom is that it is inexorably trapped by its own limitations and inability to change. I wonder what are we missing in this story?" That is the EuroTelco challenge, the EUR500bn question.

Ten things I hate about you

Last Wednesday the organizers of the Telco 2.0 event were kind enough to give me the opening presentation slot on day one, which was intended to set the scene for a lot of what was to follow. In the run-up to the event, I had thought long and hard about what sort of approach to take, but given that I only had 15 minutes to get some complicated messages across, I decided the best way would be to come up with a sort-of laundry list of things in telecom which cause worry, discomfort or pessimism among investors. The intention of this was to highlight some weaknesses which could also be interpreted as potential opportunities, which we could expand on over the course of the two day event. I also thought it was essential to get people's attention, and to deliver what was a pretty threatening message in a palatable and humorous fashion. What I came up with was "Ten Things I Hate About You," and it goes something like this (follow along if you like - the slides won't make much sense on their own).

1) Telcos have lost control of their core product - The old gags are usually the best, so I took the opportunity once again to trot out the supermarket photo from Norway, with voice and frozen peas in a battle-to-the-death for prime loss leader item in this market with one VoIP service provider for every 15,000 households. (I was surprised and flattered later in the morning when the photo also turned up in the presentation of Berit Svendsen from Telenor fixed line - wonder if she knew it came from a Telenor employee?) I then asked for a show of hands of people who had heard of RTC Factory, and only one person raised his hand, but then again he was the one who introduced me to the company in the first place, so this was no surprise. Quite a few people seemed to shake their heads in smiling shock and awe when I repeated the company's claim that it can give you (or anyone who can pay) a telco in a box with eight weeks' lead time. If investors like to see markets which enjoy significant barriers to entry, then this ain't one of them. I suggested that this implies that telcos need to think about trying to monetize the context around phone calls, rather than the billable event itself. Obviously, I said, there are others who are trying to do this already (the pay-per-call brigade and Gizmo Project's trade off of PSTN breakout in return for your real-world contact data), so get out there and rethink the value in the call. (During the feedback session, there seemed to be intense interest in what Gizmo was up to.)

2) Voice is becoming a feature, not a service - Here I called attention to the Busta widget on my Google homepage, as well as touching on some of the other early stage developments around embedding voice in web communities, virtual worlds, gaming, etc. Given the intensity of use that many of these generate, there is every reason to assume that the communication tools integrated within them will grow richer, and probably fast. One strategy for the telco on the outside, is to get on the inside, by providing the voice platform to these communities. If it's going to have voice anyway, it might as well be your platform which runs it. So far it has been the newcomers who have tapped into this trend.

3) Telcos can't grasp that consumers may not want what they're being sold - Here I observed that 45% of KPN's first half DSL customer growth came from the Direct ADSL tariff, which is basically raw connectivity with no ISP service, and now accounts for nearly 20% of the total customer base. I suggested that this seemed to be a validation of the increasing role that web services are having in the lives of ordinary consumers, and also seems to underline that where they are given a choice, many may choose to avoid telco-mediated services entirely. If I have 85 Gmail accounts, VoIP from a number of sources, a free blog, and theoretically unlimited online storage at my fingertips, what do I need an ISP for? The obvious message for telcos is that if people want dumb pipes you should sell them dumb pipes as efficiently as possible, and (as John Waclawsky from Motorola stated the next day) construct a strategy for capturing value at the edge.

4) Telcos thrive on scarcity - future value will be built around abundance - Here I gave as one example MySpace, which basically is an experiment in giving tens of millions of people simple site design tools, a lot of free storage and bandwidth, then standing back and seeing what happened. A lot of people laughed at the $600m price tag NewsCorp paid last year, but the Google advertising deal alone is worth $900m, so who exactly is the fool? Another example I gave was the Amazon S3 project, which opens up unlimited affordable storage to people who wouldn't normally have access to it, and was already enabling the creation of some high-quality sites.

5) Command and control culture is dead, open APIs rule - Here I focused on the classic walled-garden business which used to be AOL, before getting the open API religion. I also pointed out that as part of AIM Pages, users can build modules which import content from services offered by AOL's "mortal enemies" elsewhere on the web. I got distracted by my ticking watch and actually forgot to mention perhaps the most compelling recent example, which is Amazon.

6) Telco DNA is fundamentally unsuited to the current dynamics of content - Here I pointed to the example of YouTube, which serves in excess of 100m streams per day, but where the most subscribed channel of all time, lonelygirl15, has only 48k subscribers and first appeared on the site five months ago. Think about this, the musings of a teenage girl appear on the site, and in almost no time become the most subscribed channel in the site's history, but this auditable base of subscribers is tiny. To make things even more difficult to interpret, lonelygirl15 was subsequently revealed to be a stealth project by aspiring filmmakers. The audience particularly seemed to like the quote from one of them that all it took to make the videos was, "Two desk lamps (one broken), an open window and a $130 camera." I stressed that this sort of formula might well appeal to content companies or advertisers seeking innovative marketing strategies, but that if telcos found getting sports content a challenge, then this sort of dynamic could be a graveyard. Then again, who ever said that user-generated content had to be so US-centric? Can't telcos try to enable something more relevant to their home markets? So far, a lot of the weight is being carried by independent players, but on the positive side, one thing I noted was that it was not unprecedented for telcos to engage communities in the creation of locally relevent content, and benefit the core business in the process.

7) Telcos expand their footprints physically, not virtually - Readers of this blog will note the frequency with which I have talked about mutually assured destruction, which I think we are seeing play out among the big four PTTs in Europe. However, the question at the back of my mind is, why didn't a telco, maybe one with a relatively small footprint (Belgacom, Swisscom, BT) buy Skype? Why did it take eBay (and the other three or four internet players reportedly involved in the auction) to see the value of what Skype had to offer? Of all people, surely telcos should have seen what was happening and bought the company out at an earlier stage. Maybe some tried, but if so it went completely unreported, which probably is a good indication that no one tried. Ditto for MySpace - why was it Murdoch and not a telco? I could see the audience squirming, but I quickly pointed out that this was not as stupid as it sounds. SK Telecom had the good sense to buy Cyworld, which has become both an exportable, licensable platform, a generator of incremental revenue ($125m per annum in virtual goods), and serves to stimulate usage of the core asset base.

8) Telcos can't innovate - I guess this one was the proverbial duck in the barrel, given how few companies even bother to disclose R&D expenditure. I repeated Sir Terry Matthews' exhortation from VON Stockholm that telcos should get away from an obsession with bullet-proof reliability and be more adventurous in product development. Ironically, many of the people in the audience are in fact engaged in innovation efforts, and they are damned smart. However, I guess the issue of innovation is about much more than R&D if the overall organization is not driven by innovation, and some parts may even be openly hostile to it. This seemed to be a common theme of the feedback coming in towards the end of the conference - the people attending such an event would naturally be more amenable to the need to change the model, to do things differently. The real challenge was in convincing the other 99,000 people in the organization of the same. Anyway, I inevitably mentioned what many have called Google's spaghetti strategy (throw it against the wall and see if it sticks), which I think the audience appreciated as something to strive for, but probably impractical. (I noticed with interest the feedback which followed Jim Holden's presentation about Google's partnership strategy in the wireless space - a lot of it betrayed a level of suspicion and mistrust of the "step into my parlour said the spider to the fly" variety. This was similar to the response to Google at the TEN event back in June. Is there any company which instills greater fear in telcos than Google? I've been pondering this for a few days now, and am coming to the conclusion that Google may represent for telcos some very threatening ideas - a company which encourages innovation even when the direct connection to the core business may be unclear or non-existent, a company which believes in the option value of innovation investment. This is alien territory for the modern telco, and it's made even more galling by virtue of the fact that this innovation effort just happens to be bankrolled by $6bn in annual advertising revenues. Moreover, I think that Google encapsulates a telco awareness that the garage around the corner may give rise to something which could wipe you out.)

9) Telcos shouldn't try to innovate - Here I was trying to convey that some investors believe the battle is already lost, and that telcos should concentrate on things they know how to do relatively well - building and managing network infrastructure - and reposition themselves to enable the explosion of content and application innovation at the edge. The problem is obviously the need to sack tens of thousands of employees as a result, which may be untenable in a number of cases. However, I made the observation that, for companies like BT and KPN who report in such a way that investors can get some insight into divisional profitability, it is clear that the unsexy utility network business contains a lot of value. Based on BT's restated numbers from last year, Openreach and Wholesale accounted for 70% of positive operating free cash flow (EBITDA minus capex), and wholesale was 77% of the equivalent figure for KPN's fixed business in 2005. There are investors who would prefer exposure to this sort of business alone, rather than the IPTV-aggregating, me-too-softphoning service provider business.

10) Maybe the entire foundation is wrong - I had to close out with my current nagging question over the tension between broadband as a "product" (you know, the standard marketing pitches about blazing fast downloads...) and broadband as a lever of social policy and local economic self-determination (torrent version here). The access model as it is now clearly encourages and enforces artificial scarcity, when in fact what might be needed is something entirely different. If so, that means we have adopted the wrong model and invested heavily in it. A fairly downbeat topic to close on, but luckily, as we were out of time I didn't get to the part where I suggest that the entire privatization process might have been a miscalculation. Maybe next year...

UPDATE: I have published a followup here which clarifies a couple of things.

Telco 2.0 day two

I'm running behind on posting my impressions and the main messages coming from this unusual event - my wife has gone away for a long weekend with a friend, and I find it difficult to blog with small children climbing on my head. My intention at this point is to cover my experience of day two, followed by a post dealing with general impressions and messages of the entire event, and then a summary of my two presentations (hopefully cross-referenced to the presentation slides themselves).

On day two we broke into three separate workstreams: voice and messaging 2.0, advertising funded content, and broadband access. I personally have trouble seeing these three as separate issues, but I can see how conference organizers, and many attendees, would want to have some segmentation. Anyway, I was somewhat disappointed, but not surprised, to find that broadband access was the least subscribed of the three. Harking back to my experience in San Jose, I found it odd (particularly with an IMS conference taking place next door) that more people concerned about the implications of new third-party applications and content would not grasp that the likely key ingredient to innovation was unfettered access to true broadband. Anyway, the 25 or so of us grouped in the breakout room (with a disproportionately large representation from the Netherlands - arguably the testbed for a lot of what is to come) were treated to some amazing presentations.

I opened with a presentation covering the potential drivers of bandwidth demand in future, and how these didn't seem to match up very well with the more conservative views of consumer needs, particularly on the uplink, where all the interest is currently, thanks to the influence of user generated content and P2P. I went on to discuss a number of real-world examples (no doubt familiar to readers of this blog) where municipalities, regional development agencies, construction companies, housing companies, and utilities all pose challenges to the fundamental ideas underlying the traditional access model, and also raise potentially thorny regulatory issues.

I was followed by John Watlington of France Telecom (who it turns out was two years behind me at Central High School in Memphis, though we don't seem to have ever crossed paths), who gave two interesting presentations: one on the broadband incentive problem (i.e., the crunch faced by network operators in investing more in capacity for non-revenue generating bandwidth when declining revenues outstrip declines in costs - a point graphically illustrated on day one by Berit Svendsen of Telenor), the other on emerging concepts for "personal broadband", i.e., a way for consumers to access broadband in ways which are contextually appropriate to their location, financial parameters, personal preferences, and technical constraints. This slide pack from earlier this year gives some flavor of what he talked about, albeit in less detail.

John Waclawsky, chief software architect at Motorola, next gave a compelling presentation entitled "From POTS to PANs," dealing with the migration of value and context in communication to the edge, often in unpredictable ad-hoc groupings of persons and/or devices depending on the task or subject at hand. This man is a very engaging presenter, and I think his session was among the best I saw, though the concepts and illustrations were too rich for me to do justice to here after the fact. I did get a few messages in my notes which seem to sum his message up pretty well:

The challenge is not just about connecting 6bn people on the planet. It's about connecting them and all their devices. You can't swim upstream towards centralized services when the growth is going to be in distributed networks, some of which might be highly localized and dynamic in nature. If I were a network provider, I would concentrate on being the lowest-cost dumb pipe and deploy my services around the edge, just as the internet players do. These shifting ad-hoc networks are going to take shape anyway, we might as well draft a strategy to deal with them.

While his view of the future could be construed as Telepocalyptic, John had a number of illustrations of potential failure points in this looser network topology where telcos might be able to insinuate themselves to generate value: identity management, managed services, storage, admin and billing. I found John's presentation to be one of the most compelling in the two days, as it combined both some very advanced thinking about the future nature of the market as well as some pragmatic ideas around how this can be something more than a total loss to traditional players who spot the opportunities.

UPDATE: John has since posted his slides OPLAN Foundation. Those not familiar with his views might do better to do some background reading and save me the potential embarrassment of attempting to paraphrase him. There were some great moments in his talk, however. In describing the open network model, he likened the 15 - 25 year investment horizon to a mortgage on a house. The difference, he remarked, was that "I don't get charged every time I walk up and down the stairs, even though the bank owns the house." Another gem was his assertion that telcos, in seeking to define their role in providing/controlling content flows, have forgotten their 100-year legacy. In the era when the only content traversing the network was voice, the creators and consumers of content were the subscribers themselves - a situation the telcos were perfectly happy with. They have now lost this understanding of their position in the equation in the rush to become something else. Perhaps most interestingly, in light of what I see as a growing politicization of broadband globally, was his parallel with Lyndon Johnson's rise to power based on rural electrification - the message being that people are growing concerned enough for this to be an election issue in some places.

In the feedback/Q&A session which followed, one participant sought to draw a parallel between broadband and metered utilities such as water or electricity, wherein users are billed both for access and usage. One friend and long-time Palladium Class mega-uber value reader in the room immediately challenged this, making one of the best points of the two days, in my view. His assertion was that the water/electricity analogy was flawed, because in the case of broadband a large part of the value in the bits actually derived from what he himself contributed, rather than what he consumed. This got me thinking about the value of the intangibles derived from broadband: both the trivial, such as the global entertainment value of user-generated content, and the profound, such as grid-computing-based research, enabled by contributions from broadband users, rather than "consumption" of broadband, a unidirectional value flow, as telcos often tend to see it. As many have observed, the value is not in the bits, but rather in the context around the bits. I guess the only corollary in utilities may be the very small number of people with solar panels who contribute excess energy to the grid. This may strike some as hippy-ish, but if we are trying to rigorously assess the impact of broadband on all stakeholders, then we have to consider the wider definitions of value transfer.

We were next treated to two very different models of local activism in broadband access, both from the Netherlands. First was Herman Wagter of Citynet Amsterdam, who once again gave a very compelling case for why another model is required. Readers of this blog will be familiar with much of the background involved, but one slide in his presentation seemed to cut straight to the heart of what seemed to be on the mind of other attendees at this conference - the upper echelons of telco management are effectively shielded from the street-level realities of the lives of customers, or "revenue-generating units," as they are often characterized. Another significant point raised by Herman was that the muni-broadband issue historically had gotten backing from both ends of the Dutch political spectrum, and he fully expects that it will come onto the national election agenda within four years. Next came Anton Visser of OnsNet Nuenen, which I have written about previously. This is an interesting case of a local project funded by the local housing corporation, Domotica, Rabobank, and Dik Wessels-backed Reggefiber, in which service provision is driven by local residents. Interestingly, even after local cable incumbent UPC cut prices by 50%, making it slightly cheaper than OnsNet (literally "our net"), there was no noticeable churn. This is probably a function of the symmetrical connection afforded by fiber, as well as the locally-specific nature of some services (live feeds from the local church, a webcam featuring goings-on in the local street market - both of these may seem odd to the outsider, but Nuenen has a high proportion of elderly residents).

There were some interesting contrasts raised in the Q&A about the Amsterdam and Nuenen approaches. Nuenen can maintain an integrated access/services model based on a high level of home ownership and an older, more stable and affluent population, whereas Amsterdam opted for a layer one, open-access model partly due to a lower level of home ownership (c.10%), and more generationally diverse population.

After a short break, we heard from Colby Goff of WiFi access point aggregator Boingo Wireless, who had some stunning figures on growth in sessions and also session durations at its sites. Based on data collected in its network in August, session length is up by 25% since March, at 103 minutes on average, versus 81 minutes in March. Over the same period the number of sessions is up by 196% at Boston Logan Airport, by 55% at Charles de Gaulle, and 22% at Copenhagen International. Clearly, as more people have WiFi at home, they are coming to expect it as a natural feature of the landscape when travelling, and do appear to be willing to pay for it.

Lastly, we were treated to a pretty stunning product demo from Stuart Collingwood of Sling Media. He went straight for the jugular at the beginning, showing some very nice streams to a mobile handset over a questionable 3G connection, from a Comcast box in San Diego and a Viasat box in Sweden. He then showed us the laptop client in Slingbar mode, which virtually replicates the remote control of the appropriate service, covering a wide range of pay TV providers. "We even included HomeChoice, just to be thorough," which provoked laughter from those resident in the UK or otherwise familiar with that company's unfortunate failure to gain significant market traction. There were some intriguing statements in his presentation about the wider range of application which the box is seeing - remote head end monitoring for cable companies, CCTV monitoring, BBC World Service using Slingbox to monitor studios around the planet, even remote monitoring of babysitting/childcare services via a webcam. Stuart also remarked that, in his view, this was the first example of an application which could actually glue together the disparate elements of the triple/quad play, i.e., pay TV talks to the broadband connection and can extend it to the mobile phone. He claimed that this was a contribution to lower churn rates among Slingbox users, provided that service providers kept up their levels of reliability in other areas. There were also some classic telco executive quotes from recent meetings with Sling Media, including one senior exec who, having seen the Slingbox in action, demanded to know why he was currently constructing a DVB-H network. Stuart's summary comment was that many players, both telco and media, are building internet content strategies around technologies which have already been superceded. Perhaps unsurprisingly, along the way there were references to some broadband service provider partnership announcements in the pipeline.

We all reassembled at the end of day two in a closing plenary session, during which each of the workstreams, as well as the sister IMS event next door, reported their findings. As the audience entered its feedback into the system, Tomi Ahonen stood up and gave an extemporaneous and very animated pep talk to the audience, which probably would have gotten a more enthusiastic hearing if it had been a rebuttal to my opening presentation on day one. It was raining and miserable outside, the attendees were bleary-eyed and probably wanted to go home. Yet what he said made perfect sense. He spoke about the huge amounts of money spent within social networks and virtual worlds, as well as in viewer-driven programming such as Pop Idol and its variants, a recurring theme of many other presentations (including mine), but he made the case that telecom can capture some of this value via its own legacy assets. He specifically mentioned the case of the public backlash against the Finnish Pop Idol contestants, which resulted in twice as many people voting for the alternative performer. Rather than seeing user generated and driven content and trying to play in this arena themselves, telcos needed to be aware of what was in the ether around them and figure out how to insinuate their core legacy assets into the equation. It was a relatively upbeat final message at the end of two days of uncomfortable home truths, but one the audience probably needed to have in mind as they walked out into the rainy streets of London.

Telco 2.0 - day one snippets

I'm exhausted. I met so many interesting people today I can't count them, and I also hooked up with a lot of old friends. Plus the sun was shining, so today was a good day. Except that the mood inside the Tower Bridge Hilton was considerably darker. I'm too tired to do a full post on what happened at day one of Telco 2.0 - I'll do that in due course. For right now, here are the highlights of my day.

Let's start with the end of the day. The final item on the agenda was an audience poll, conducted on organizer Telvents' spiffy little notebooks distributed around the audience. The question was, "How confident are you today in the ability of telcos to create long-term sustainable growth in an IP-based world?" The results - 30% said "very unconfident," 23% said "not very confident," and 14% were not sure. Pretty damning stuff, but hardly surprising to me based on my previous involvement in events of this kind.

Maybe it was my fault. I was the opening stimulus speaker and "analyst in residence" for the entire day (think sports broadcast color commentator). My presentation was entitled "Ten Things I Hate About You," and was a distillation of ten common themes around which investors have concerns/criticisms. More about this in my lengthier followup post. I think it went pretty well.

The next two presenters, Abdul Guefor from Intel Capital, and Gordon Smillie from BT, spoke about a lot of themes which were also in my presentation - the need to be more open, to embrace the chaotic and find a way to adapt to it. Abdul's Platinum comment of the day, in my mind, was that telcos should learn to embrace controlled chaos, and talk to the rest of the world more regularly. "If you don't address these issues, Private Equity will," a recognition of the vast PE war chests looking for underperforming assets which nevertheless throw off a lot of cash. Gordon Smillie, who comes from a background outside telecom, has a really interesting presentation, which included the observation, "In the past we have been used to having time to evaluate where the next threat might come from. Just accept it is coming. Why wait to react? Define what market you're in, and compete in it." He also said something which intrigued me. "Telco outsiders looking in think that telcos' strategic assets are different than what the telcos themselves think they are." He also questioned if current telco structures are capable of delivering innovation, or whether some internal incubation structure needs to take root.

Norman Lewis from Orange was the barnburner presentation of the day, hands down. His opening line was that we shouldn't look at technology as an indicator of where the industry is going, we should look at childhood. Children, because of concerns over safety, are no longer allowed to do the things in the physical world which they might have once done freely. Confined in a restricted physical space, they pursue ways to define their own personal space by virtual
means. This is not technology to them, it is life, it is reality. Any future applications which do not have a social networking aspect to them will be irrelevant. If we don't understand that, we won't have a business in future. We should be viewing customers as points in the value chain, not end points. We should open up devices, with easy scripting languages which can allow them to be not just customers, but co-authors of the applications which will spread virally. He also had some intriguing comments about the next battle ground - open information systems and data retention - i.e, with all the user generated content and associated metadata proliferating currently, who claims ownership and how is it used? My summary doesn't do the presentation justice. It was simply wonderful, and it's inspiring to hear someone speaking with such conviction.

Kennet Radne from TeliaSonera had a slightly more conventional presentation which touched on many of the same themes. But it had one killer data point - when The Pirate Bay was taken down in Sweden, TeliaSonera's IP traffic declined by 60%.

Alessandro Petazzi from Fastweb came in with a presentation built around lessons learned from its leadership in IPTV deployment. This sobered people up, though he wasn't heavy-handed in his delivery. There was a lot of interesting information here, but the bullet points that the audience seemed to react to were: there was no discernable improvement in subscriber lifetime among triple play customers; offering premium sports content as a free incentive for subscriber acquisition had increased churn; people who were willing to buy premium content on the network were relatively price inelastic; these people are relatively small in number, but their average expenditure is significantly higher than average. He also made a great comment during Q&A to the effect that the amount of additional money you can squeeze from customers is governed by your place in the value chain - you have to accept that. Personally, I found this all fascinating given the near-hysteria surrounding IPTV. Here we have a player with five years of experimentation and marketing experience behind it, saying something pretty different from what many relative newcomers to the space seem to think.

There were some other presentations from Google, Intel, Yahoo!, Telenor, GSMA, et al, all worthy of some comment in a later post. I want to close out with some observations about the presentation given by Ken Ducatel, who works for Commissioner Reding. He ran though the key points of the Commission's review of regulation (spectrum management, elements of veto power at EU level, etc.), and then spent a long time on the issue of structural separation, an idea floated by Commissioner Reding in June, but not formally raised in the official communication which followed. It seemed to me as though he was trying to sound out the audience on the issue, and urged them several times to respond to the consultation which runs until 27 October. At the risk of misrepresenting his statements, what I took away generally as a message was that changes in the nature of service provision in an IP age, as well as provisioning problems encountered by the incumbents (presumably equal infrastructure access to third parties) makes structural separation a potentially attractive solution. My gut feeling, without seeking to over-exaggerate, is that this is a key area of interest to the Commission, and that it is something to watch very closely.

I've got to go to bed now. So far I feel, and many others have said, that this is indeed a different sort of event, and the sense of self-examination and self-criticism from the executives here, many of them very senior, is palpable. However, the other sense I am getting from attendees is that the realizations arising from this process are one thing, but implementing change and modifying organizational DNA are quite separate challenges.

UPDATE: For an excellent summary of day one and the voice and messaging workstream on day two, see here.

Hope you're sitting down

A friend pointed out this article from Bloomberg today on accuracy of analyst stock calls. I like the reference to the poor senior Wall Street analysts having to try to get by on $600k per annum, as against $1m on average six years ago. I personally would love a chance to muddle through life on "only" 600 grand - I think I could just about manage - I might even buy a new bicycle. (Author's note - in case the irony above has not been clear enough, I am paid very spectacularly less than this figure.)

Anyway, here's the "there's no justice" aspect to the story. On the Bloomberg terminal version of the story (and in the brand-new edition of Bloomberg Markets magazine), there is an attachment which actually lists the most accurate 20 stock pickers in investment banking research according to the survey, based on an analysis of calls made by 2,500 analysts on a sample of 200 companies over the period August 2004 - July 2006. Judging from the .jpg I ripped, I appear to be one of them, as does my boss David Stedman. Suffice it to say that this has generated much interest internally, where I am, ahem, somewhat misunderstood.

UPDATE: I have to confess to being excited and bemused in equal measure by this news.

On the one hand, I love the idea that a two-year number-crunching exercise compiled by a trusted source of financial data has yielded a result which gives Daiwa 10% of the top 20 analyst slots, especially in light of the fact that the brand name Daiwa is usually associated outside Japan with fishing rods (this is an unrelated company). Among all the esteemed names appearing on the list, Deutsche Bank is the only other company which appears twice. At first it seems counterintuitive, but hell, if it's good enough for the mayor of New York, it's good enough for me.

On the other hand, this strikes me as almost surreal, given the reality underlying it. European equities are a very small part of the overall Daiwa business, and accordingly, we are a very small department. An outsider looking in might say that we are woefully underfunded, under-resourced, and pretty much unloved internally - and I would probably have to agree with them. My boss David and I are one-man shows, like all of our analyst colleagues. None of us has any support - no research assistants, no junior analysts, no specialist sales. Compared to most of our competitors, we wouldn't seem to have a chance in hell of differentiation against all the noise they can generate. Then again, maybe this survey suggests that noise doesn't have that much to do with it.

Then I look (via the webcast) at the mass of people who made the trip all the way to Milan for a four-hour Vodafone presentation today, and I think about the expense (travel, accomodation, office premises, IT, production, compensation, deforestation [why must brokerages continue to print research?]) incurred in supporting the conventional sell-side research effort, and I have to say that I am more perplexed than ever about the rationale for this industry to continue to exist as it is now. I guess someone will sort all this mess out.

Pipes - yours, mine, and ours

It seems clear from the preceding interview with OPTA chair Chris Fonteijn that OPTA believes the best solution for competition is a fully unbundled local loop. This would seem to be a validation of the single, neutral network platform models. One example, Amsterdam, is discussed in an interesting interview which uber-cyberfreund Gordon Cook did with Herman Wagter of the Glasvezelnet project (glad to say I made the introduction!), which subscribers to the Cook Report read a few weeks back.

Open season

Three mega-uber value readers have alerted me to the front page of Dutch financial newspaper Het Financieele Dagblad, which reports that OPTA is planning to intervene in the KPN FTTC deployment. Readers may recall that I have previously questioned the regulatory implications and effects on competitor investment plans, and today it looks like we have some greater visibility on these. According to this article, KPN will have to keep the PSTN open until 2011, versus their plan to decommission it in 2010. More importantly to the ULL competitors, KPN will have to keep open the 400 central offices where ULL players are present, versus the original plan to shut all 1,350 sites and fund the FTTC investment with the proceeds from real estate disposals. And as for the FTTC plant itself, OPTA will impose an obligation to allow collocation to third parties either in the 200 "super central offices" or at any of the 28,000 local access nodes. In theory this is a big win for the competitors, but I still have concerns, expressed previously, that some of them may not have the stomachs for this level of investment. Moreover, the practicalities of building density and local planning codes may make collocation at the local nodes impractical in many cases.

UPDATE: Cyberfreund and mega-uber value reader Yves over in Brussels has some extremely helpful additional insights, particularly useful for non-Dutch-speakers.

Reanimation

Mega-uber value readers, I have ignored you too long, buried under work commitments. I pledge to do better in the coming days.