Friday, February 27, 2009

Government participation in FTTH: the bad and the good

Here is a worthwile read on government intervention in telecoms. I agree with much of what Tristan Ewins says, but at some point he just completely loses it. What does it mean: re-socialising Telstra?

He juxtaposes competition and the natural 'public' monopoly (NMP). According to his definitions, public means: government-owned (contrary to the usual dichotomy of private versus public, where private means not listed and public means traded at the stock exchange).

Anyway, here are his main points (that is, what I make of it):
  1. Competition may lead to duplication, a NMP prevents waste.
  2. Competition leads to frustrated incumbents, that are restricted to such a point that they stop functioning like true market participants. A NMP prevents abuse, which a 'private' (non-government owned) monopoly would be inclined to.
  3. Competition will only serve the masses. A NMP will serve minorities and rural areas too.
  4. Competitors are only accountable to shareholders. A NMP is accountable to the government only, i.e. to all the citizens.
Here is my point by point criticism:
  1. There seems to be little consensus on duplication. I think everybody would agree that in-building networks should not be duplicated. Excessive duplication should be avoided, but what does that mean? Fundamentally, I believe in the highway parallal: who needs two highways? This is exactly what IP brings us: all we need is one fiber. However: building separate networks is sure to bring proper competition and would benefit employment and the telecom vendor community.
  2. Incumbents are frustrated, that's true. My solution would be to structurally separate them and manage the passive infrastructure much like water and power networks. If they are government owned, they may have fewer incentives to abuse their power. But they will have to be incentivised to create value for their wholesale customers. A 'Government Business Enterprise' soounds great, but please: not as a commercial service provider. Futher: we have regulatory agencies to prevent/punish market abuse.
  3. Good point.
  4. Not a very good point. Bottom line, value needs to be created. Even by non-profits, mind you! So, it remains to be seen who is better suited for oversight: shareholders or citizens.
Here is my view on government participation:

One aspect that should be included in planning an FTTH network, is government participation - on several levels:
  • Financial: subsidies and tax breaks may apply, esp. under current stimulus packages or funds for rural development. Note that these efforts may not only be aimed at network owners, but at prospective customers as well; by granting the latter subsidies for switching to FTTH, the new networks are guranteed a certain level of business.
  • Regulatory: builders need clarity, esp. on open access requirements and compulsory sharing of ducts, in-building networks, etc. in order to prevent excessive network duplication.
  • Legislative: to get speedy (i.e. sans red tape) access to rights of way, such as sewers and sidewalks.
  • Strategic: get government agencies, including public schools, to sign up and become anchor tenants.
To achieve this, simply point them to the benefits of taking part:
  • Grab the advantages: by allowing consumers and businesses to exploit all the benefits (economic, social, and environmental) of the network.
  • Save on ICT expenses: by becoming an anchor tenant.
  • Happy citizens: by preventing excessive network duplication.

Wednesday, February 25, 2009

Telstra is looking to replace Trujillo

What was rumoured before is now a fact: Sol Trujillo will step down as Telstra's CEO by June 30. The board expects to have found a successor by that time.

This is potentially good news for all who believe in open access FTTH. The real reason for Trujillo's departure may remain undisclosed, but under his rule a way back into the NBN process would have been impossible. There's a good chance that the board realised that change has come to the telecoms sector and open access is the name of the new game. Trujillo typically believed in a closed network and vitriol-rich press releases to undermine his rivals.

Competitors should be valued as wholesale customers. And if this whole co-opetition thing doesn't work, then there is just one solution: structural separation. The threat of structural separation could have been another reason for the board to end Trujillo's reign: under a new CEO, the government may feel it isn't necessary after all.

Skype faces legal proceedings

Skype could be facing a rough month of March, as per the recent 10-K filing (page 32-33). If a lawsuit is filed, we will know who (and which technology) this third party is.

Skype licenses technology underlying certain key components of its software from third parties it does not control, including the technology underlying its peer-to-peer architecture and firewall traversal technology and the video compression/decompression used to provide high video quality. Although Skype has contracts in place with its third-party technology providers, there can be no assurance that the licensed technology or other technology that we may seek to license in the future will continue to be available on commercially reasonable terms, or at all. The loss of, or inability to maintain, existing licenses could result in a decrease in service quality or loss of service until equivalent technology or suitable alternatives can be developed, identified, licensed and integrated. While we believe Skype generally has the ability to either extend these licenses on commercially reasonable terms or identify and obtain or develop suitable alternatives, the costs associated with licensing or developing such alternatives could be high and the technical challenge of assuring “backward compatibility” with older versions of Skype’s technology may be difficult to overcome. Any failure to maintain these licenses on commercially reasonable terms or to license or develop alternative technologies would harm Skype’s business. Skype and one of its licensors are currently attempting to resolve a dispute concerning certain key licensed technology. The parties previously entered into a “standstill agreement” to allow further time to resolve the dispute without the possibility of immediate litigation. While Skype is continuing to attempt to resolve the matter, in February 2009, Skype terminated this standstill agreement, and either party may commence a lawsuit against the other party beginning in March 2009. Although Skype is confident of its legal position, as with any litigation, there is the possibility of an adverse result if the matter is not resolved through negotiation. In such event, continued operation of Skype’s business as currently conducted would likely not be possible.
And then there are these long-standing issues (pages 41 and 42):
Skype is in the process of applying to register the Skype name as a trademark worldwide. In the EU, Skype’s application is being opposed. If these oppositions to Skype’s applications were to be successful, Skype’s ability to protect its brand against third-party infringers would be compromised. We have licensed in the past, and expect to license in the future, certain of our proprietary rights, such as trademarks or copyrighted material, to others. These licensees may take actions that diminish the value of our proprietary rights or harm our reputation.
In June 2006, Net2Phone, Inc. filed a lawsuit in the U.S. District Court for the District of New Jersey (No. 06-2469) alleging that eBay Inc., Skype Technologies S.A., and Skype Inc. infringed five patents owned by Net2Phone relating to point-to-point Internet protocol. The suit seeks an injunction against continuing infringement, unspecified damages, including treble damages for willful infringement, and interest, costs, and fees. We have filed an answer and counterclaims asserting that the patents are invalid, unenforceable, and were not infringed. The parties have completed claim construction briefing and attended a pre-trial conference hearing. The claim construction hearing is set for March 2009 and the trial date is not yet set. We believe that we have meritorious defenses and intend to defend ourselves vigorously.

Wednesday, February 18, 2009

Amsterdam: FTTH penetration at 35%

When Amsterdam, KPN and Reggefiber recently announced that they were close to entering Phase 2 of the munifiber build-out, they were somewhat secretive about the number of homes activated. A local journalist pulled it out of one of the managers: 3k, on a total of 43k, which makes a penetration rate of 7%. Since work started 3 years ago, that was a less than impressive number.

However, things need a little clarification, as an insider informs me. First, hooking up was made available just 2 years ago. Second, yes there have been all sorts of everyday problems in rolling out. Third, Amsterdam not only counts homes passed (43k) and homes activated (3k), but homes connected too. The latter number stands at 9k, for a penetration rate of 35%.

What a little PR can do.

Still, the number of homes passed would still be of interest to me. I guess we need some 'performance measurement' standards when it comes to measuring penetration rates.

Lastly, the FTTH Council numbers last week also build upon the number of homes passed. See this IDATE information to find out some detail on the number of subscribers (= homes activated). The Netherlands stand at 350k homes passed and 29% (101.5k) of that as homes activated.

Monday, February 16, 2009

The case for FTTH - once more

In defending FTTH, one runs up against two problems: price (it's expensive) and speed (do we need all that?). Of course these are interconnected (if demand is high enough, pricing can go down and FTTH will be more successful and the business model works).

Skeptics abound, especially among the cable industry, so it takes tirelessly summing up advantages of FTTH (viz-a-viz cable). Here's another (concise) effort.
  • Growth. At current growth rates, access networks will soon run out of capacity.
  • Video. The internet was originally designed with data in mind. Soon graphics came along, and now video is all over the place. All the e- and tele- applications of the world probably have a video component, often for upstream too (symmetrical, that is). Of course, there is IPTV too. Plus: video evolves toward HD, 3-D and holography.
  • Apps. New applications will come as FTTH spreads, pretty much the way electrical instruments were developed when the electric grid became universally available. Check out this Alcatel-Lucent release (on the ng Connect Program) and this one from Aepona, to see how application development and how to bring them to end users are hot today. What it all means? Telcos need to partner if they want reap new revenue steams.
  • File sharing. This goes beyond illegal P2P. Some examples that make files go up, down, left and right through the network: file sharing (legal versions), place-shifting (Sling), cloud computing, storage and online backing-up.
  • Femtocells. These in-home miniature base stations backhaul mobile traffic over the user's BB connection (freeing up both outdoor base station capacity and mobile operator backhaul capacity). They will become an essential part of 4G networks operating in higher frequency bands (2.6 or 3.5 GHz) and put a strain on the subscriber's BB connection.
  • Copper doesn't cut it. Copper networks were designed with just voice in mind. DSL did wonders, but is running out of steam now.
  • Timing. Even if we don't need it today, we certainly need it in 10 years time. Build-out takes long, so we better start today.
  • GDP grab. If you don't build it, somebody else will. Cities and entire nations are already competing to build out FTTH networks in order to grab some extra GDP growth. Hence, broadband stims are finding their way to the market.
  • Opex. FTTH is cheaper to service than copper.
  • Green. Redundant FTTH networks save on travel expenses, fuel, carbon emissions, etc.
  • Redundancy. We need excess capacity because we hate waiting. We also need low latency for fancy apps such as gaming.
  • Moving. Perhaps not everybody needs FTTH, but people move - on average, once every 7 years (could be a bit slower today). So, not every body but certainly every home needs FTTH. Also, even if only families (roughly one third of all homes) are the addressable market, one has to realise that singles (one third) and couples (one third) tend to morph into families.
  • End-game. Not just copper owners switch to fiber, alternative carriers and utility companies (with no legacy to worry about) also choose FTTH - not coax, mind you. Even cable execs acknowledge that FTTH is the end game; and those that do not, call their Docsis 3.0 service 'Fiber Power'.
(Who can switch the order in such a way that it makes a nice acrostic and the red letters connect to a relevant term?)

Skype sale limited by Silicon Valley clusters

Skype was probably rumoured to be for sale the day after eBay bought it. Recently, at the Q4 analyst meeting, new speculation found furtile soil. I added a little myself.

There is an interesting case for incumbents to take a look at Skype (which neither is a very new idea). Not only would they buy back some lost revenues, but they would also expand internationally (including emerging markets, where they all want to focus their investments at this point - talk about following the crowd). I particularly like the option to buy an international brand name that could be extended to include other services (such as operating the services and the active layer in FTTH networks throughout Europe).

A very valued reader pointed me to a limitation regarding Skype's sale. It has to do with how Silicon Valley seems to work. Apparently, development activity in Silicon Valley is grouped together in a number of clusters, and the sale of proprietary technology that Skype sits on may be limited to companies within the cluster. It could possibly even be a little more pronounced than that: the technology (check out this 1998 company and see what has become of it) serves as the basis for VC groups to set up a range companies. In Skype's case: the Joltid Global Index sofware was first used for Kazaa, then for Skype and next for Joost.

I'm not quite sure how these clusters are formed, but supposedly there is one around Redmond (Microsoft - don't mind the exact geo location), one around Palo Alto (Sun) and one around Stanford (Google, Yahoo!, eBay). This seems to preclude a sale to anything like a European incumbent. But how about KPN - doesn't its iBasis subsidiary have a deal for SkypeOut?

Monday, February 09, 2009

Vodafone and 3 Australia: why no network sharing?

Vodafone Australia and 3 Australia are merging into a 50/50 joint venture VHA, apparently to better compete with Telstra and Optus.

Three comments:
  • Mobile markets worldwide seem to disagree on the number of players required for just the right amount of competition. In Germany, calls have been heard for years for a merger of the #3 (E-Plus) and #4 (O2) operators to merge. In the Netherlands, the market went from 5 to 3 players, but now the competitive level seems to have dropped below the ideal level; a fourth player could enter once more, once 4G spectrum is auctioned off. France is a comparable case.
  • Why not do a full network sharing deal, for both passive and active (RAN) elements? Vodafone and 3 would vastly improve their cost base and could still market their own products and services. Vodafone has a solid position in the prepaid market, 3 has more data-centric postpaid subs. The venture is going with the Vodafone brand, so 3 is effectively getting out of the market, in exchange for a 50% share. Migrating 3's subs to Vodafone may cause an incredible headache.
  • Are more deals in the making? Rumours have been going around about 3 giving up its position in Italy and the UK. Vodafone comfortably has a position in those countries as well. Australia could be a testing ground for 3 to quietly get out of the mobile business altogether.

There is more to FTTH than triple play

Services over FTTH is about a lot more than the triple play, as is shown in this presentation (slide 17). I wonder what Benoit is going to come up with next week, in Copenhagen. I recommend anyone with some time on their hands to go to the FTTH Council conference.

In the meantime, two things caught my eye. Remember, FTTH has two basic issues to deal with: cost and bandwidth. As to the latter: What on earth are people going to do with all of that?

First, taken from this article: "Verizon is building its service strategy around four pillars -- entertainment, productivity, communications, monitoring and controls." Videoconferencing, security and remote energy management are coming.

Second, how about 'financial management'? The financial industry is shaking and will be looking out for new business models itself. The initial step is online banking 1.0. It has caught my eye that numerous banks in the Netherlands are launching all sorts of online brands. Lean, mean and clean, so to speak. Check out the list. All the big ones are there, except ING (which, inside sources tell me, is preparing a big market push, without any sub-brands):
  • Rabobank: freo.nl (loans), inshared.nl (insurance), moviq.nl (real estate), Bizner.nl (SME banking)
  • ABN Amro: florius.nl (mortgages), moneyou.nl (full concept)
  • Fortis: ditzo.nl (insurance)
  • APG: loyalis.nl (savings, loans, insurance)
  • DSB: lenen.nl, frisia.nl, becam.nl, postkrediet.nl (loans)
  • NIBC: nibcdirect.nl (savings)
  • Allianz: Allsecur.nl (car insurance)
Let's wait for banking 2.0 to become part of services provided over broadband.

Friday, February 06, 2009

New Research Brief: Skype for sale?

Today my employer publishes a Research Brief on Skype. It elegantly counts 7 pages, 7 paragraphs and 7 tables.

Paragraphs:
  1. Skype may be up for sale
  2. Skype is an established VoIP player, with an extensive product range and ecosystem, but is not a primary line service
  3. Usage growth outstrips user growth, but revenue growth lags behind
  4. Revenue growth disappointed from 2006, but the margin has reached an estimated 17%
  5. The network effect delivers high growth, but revenues from SkypeOut could be in danger
  6. European incumbents could expand internationally on the wings of Skype
  7. Google-like growth would imply a USD 600-700 million valuation
Tables:
  1. Skype products
  2. Selected embedded technology partners
  3. Selected distribution partners
  4. Users, usage and year-on-year growth rates
  5. Revenue, year-on-year growth rate and usage
  6. Short P&L
  7. 2008 Results, market capitalization, total enterprise value and multiples

Open access: If you can't beat them, join them

Paul Budde has the 'official' news: Sol Trujillo is out at Telstra. Another big win for the open access movement - hopefully (it remains to be seen who will replace him).
Paul rightfully refers to KPN's open access strategy, but let's not forget that it was not just NGN thinking that forced it upon them. KPN must have felt pressured by the loss of fixed lines (down 50% to 2.5m in just 3 years), heavy competition from cablecos (who have near 100% coverage), and last but not least: Reggefiber's stealth advance in the markt. In FTTH towns such as Nuenen, cable and KPN are almost extinct.

Wednesday, February 04, 2009

Some thoughts on KPN's vertical integration

Amsterdam finally published the Phase 2 plans, with the KPN/Reggefiber joint-venture, for its munifiber Citynet network. Phase 1 included 43k homes. Some notes:
  • No timescale for the 100k homes, let alone the final 250k ones.
  • I asked Ad Scheepbouwer about his views on KPN's stake in the passive layer. It has an option to acquire a majority in the Reggefiber joint-venture, but it could also allow it to dilute by raising third-party funding and ultimately get out of the infrastructure business altogether. Alas, Ad keeps his options open at this time. Reggefiber, for that matter, has no ambitions whatsoever to become a service provider (they do have a stake in the XMS joint venture with BBned).
  • I liked mayor Job Cohen's referral to earlier PPP projects: the Amsterdam banking industry (400 years ago), the North Sea - Amsterdam channel, Schiphol airport and the wildly interesting AMS-IX.
KPN will also be operating the active layer (BBned is the active operator on the Phase 1 section), and be service provider as well. In other words, it will be a vertically integrated operator/provider once more. No exclusivity in the active layer, though (which BBned has). Some more notes:
  • It remains to be seen if it works. The regulator should monitor KPN's actions (pricing) very closely.
  • Will only SPs compete, or will there be alternative active operators as well? In the Phase 1 areas, competition is limited to SPs, because of BBned's exclusivity. However, the number has gone down drastically, and two (Alice and InterNLnet) are owned by BBned itself. Is there no interest in competing in the services layer only?
  • Competing in the active layer is a lot more expensive, but I believe this is equivalent to LLU investments in the DSL world (cutting out the wholesale payments to KPN to improve the business case). This implies two things: 1. You need scale. 2. Since FTTH is the end game, there is no risk of becoming obsolote (which has happened to LLU operators, who were subsequently hoovered up by KPN). In other words: a new entrant, operating the active layer (and bringing its own SP) could alter the Dutch landscape dramatically. I see a big opportunity for other incumbents to first buy BBned (it's for sale!) and then expand.
  • Obviously, some things stand in the way of operators expanding into the Netherlands: 1. The global financial crisis, 2. focus on expansion into emerging markets.
  • Still, there is also a case for European incumbents to enter the Netherlands as service providers only: find some extra growth from an infrastructure-light approach, get experienced in an open access FTTH environment, hurt your competitor (KPN), etc. Now, of course you would ideally need a good brand name to make such a move. KPN is expanding Simyo (its MVNO) across Europe, which could serve as a mobile equivalent. How about Skype (it seems to be for sale ...)? It could be used as a vehicle for any incumbent and subsequently be enhanced with new products, turn it into a pan-European SP (and next get into the active layer).

Mysteries around KPN's FTTH trials disolved

Here's a short follow-up to some questions around KPN's success in an early FTTH deployment, mentioned in my previous post.
  • ARPU = EUR 58 seemed low relative to the 65, 80 and 110 triple play packages KPN offers. The answer to the mystery is embarrassingly simple: ARPU numbers exclude VAT.
  • 2x5 towns refers not only to 5 FTTH projects, but to 5 FTTC (+ VDSL) trial projects as well, as mentioned in the Q3 report. I'm quite confident that KPN won't go with FTTC.
  • 16% penetration refers to the number of activated homes as a percentage of the homes connected (which is a number not much below the homes passed number). Here it becomes apparent that KPN has a much easier up-sell than Reggefiber. KPN can simply offer a migration with very little risk of service interruption. Reggefiber, as a stand-alone unit, has to compete with existing offerings from KPN and cable. Hence, Reggefiber's strategy to assure itself of some 40% sign-ups in advance.