Dumb-pipe operator or dumb pipe-operator?

Two remarkable releases from the Dutch mobile industry:

• Vodafone NL CEO Rob Shuter on the company blog: "The multiband auction last December brought an unexpectedly large windfall for the Dutch treasury of EUR 3.8 billion. For us, however, this meant a solid bill shock of 1.38 billion! We were obviously fully aware when auction prices for mobile frequencies were established, but all parties agree that the prices were much higher than expected."
• KPN, Vodafone NL and T-Mobile NL are suing the Dutch government over the 2012 multiband auction. Vodafone claim that reserving spectrum for a newcomer created artificial scarcity.

It is rather ironic to have mobile phone companies complain about bill shock and artificial scarcity, because these are at the heart of the industry. In fact, they have sort of invented those terms.

As to bill shocks: mobile operators charge ridiculous prices for international roaming (which next year will end) and for some reason there is still no pan-European pricing (T-Mobile Austria charges €17 while T-Mobile Germany charges €96 for the same smartphone tariff allowances). Further, the companies are using the fact that most people didn't see high prices coming (we did), which created a buzz in the press about overpaying. But in reality, other auctions brought in more on a per MHz per capita per year basis. And the result wasn't impressive in relation to the 2011 UMTS auction. And last but not least: buying a 17 year mobile license creates an enormous entry barrier and comes at the expense of EUR 230 per sub or just over 1 euro per month per sub for Vodafone.

As to artificial scarcity: this is exactly what telecoms operators create, slicing & dicing available bandwidth (i.e. throttling) in order to create a 'business model'. Mind you, this whole throttling of a 24 Mb/s ADSL service to tiers of e.g. 1, 2, 4, 8, 12 and 24 Mb/s (or a 1 Gb/s service to 50, 100, 200, 500 and 1,000 Gb/s) is extremely expensive from a capex/opex point of view (equipment, billing, marketing) and is hardly warranted by the associated costs (a 24 Mb/s sub is probably not much more expensive than a 1 Mb/s sub).

Yahoo!/Tumblr: combining UGC and social networking is where the action is

Yahoo! is acquiring Tumblr. The specs:

• 117m users (growing 120k per day), 108m blogs, 300m monthly active visitors
• 75m posts per day, total 51bn
• Raised $125m
• 2012 revenues $13m
• 175 employees
• Combining with Tumblr will grow Yahoo!'s audience by 50% to 1bn and traffic by 20%.

Tumblr is a combination of user-generated content (UGC) and social networking, like Instagram (Facebook), and in a sense comparable to Pinterest (pictures), Waze (social mapping & traffic info, going to Facebook). Flickr (Yahoo!) could expand its social functions as well, as could YouTube (Google).

Pulse went to LinkedIn and Yammer to Microsoft. Other obvious takeover candidates are those that in a way combine UGC and social networking:

• Pinterest (pictures)
• PhotoRocket (photos)
• SlideRocket, SlideShare (presentations)
• Evernote (notes)
• SoundCloud (music, audio files)
• WordPress (blogs)
• Quora (Q&A)
• Path (mobile social net)
• Dropbox and Box.net (storage)
• Twitter (text-based microblogging)

More on access and services

Telecoms is moving away from its 4 traditional silos: fixed voice, broadband, TV and mobile. A more compelling way of looking at it now is (see previous post):

• Two enablers:
• Devices (portable and non-portable)
• Access (fixed and mobile)
• Two classes of services:
• Communication (voice/video calls, text/IM/chat, M2M)
• Entertainment (TV/catch-up/VOD, gaming)

And thus:

• This could be the basis for new regulation.
• The distinction between managed (traditional voice, SMS, TV) and OTT services is becoming less meaningful. Net neutrality is used to create OTT competition to managed services. The call (mostly from the fiber community) to create new and compelling services ('killer app for FTTH') seems quite ridiculous, considering the innovation going on in the OTT space. And as witnessed by the thousands of apps available on smartphones. Not to mention that it is the world upside down: we are not looking for new services to justify the roll-out of NGA networks; we are rolling-out NGA networks to keep ahead of demand (c.q. commoditise bandwidth, put an end to throttling, remove bandwidth as an artificially scarce resource) and especially because of the implied opex savings.
• A distinction between telco and cableco no longer makes sense.
• Access:
• Each of these markets are very competitive, except access. Unless it no longer makes sense to distinguish between fixed and mobile. LTE allows mobile operators to offer fixed-line replacement services, WiFi allows fixed operators to launch quasi-mobile services. Governments could consider to allocate lots of spectrum for unlincensed use to make sure that technologies such as WiFi increase competition.
• The access market is core for telecom operators. It creates subscriber ownership and generates fat margins (whatever the operators claim). Operators are now throwing in free services to attract/keep broadband subscribers e.g.:
• KPN: free access to Spotify Premium.
• BT: free access to BT Sports.
• Communication is traditionally voice and SMS. A third leg is M2M, e.g. DT's usage-based insurance (mobile) and home automation such as AT&T Digital Life (fixed). The commonality between these services appears to be: sensors.
• The 'entertainment' market is still developing. It consists of video (live TV, catch-up TV, VOD) and gaming. Will there be a third leg?

The new dichotomy of connectivity and services

Technological innovation, competition and regulation shape the telecoms sector. The entry of OTT providers has one the one hand been more of the same, but on the other hand it is causing big changes. If we take a step back to see how the sector changed over the past two decades or so, this is what appears to be going
on.

First, let's look at what we have to work with:

• Telecoms is a privatised free market.
• Regulation consists of defining markets, ascribing significant market power and applying remedies (on the wholesale or retail level).
• There are two infrastructures (in most countries to at least some extent): copper (nationwide) and coaxial (regional).
• Telecoms is a scale business. The entry barrier (capex, licenses) is very high. It has a tendency towards a monopoly, duopoly or oligopoly.

In the old days, the wider telecoms market was about traditional managed services (voice, SMS, TV). There was a somewhat artificial distinction between line rental (basic charge, fixed) and a usage-based fees. Competition was inter infrastructure (copper vs. coaxial) of intra infrastructure (unbundling, reselling). A three-layer model (passive, active, managed services) could be applied. The incumbent telco was regulated, the local cable company (lacking nationwide coverage) was not. When services such as CS and CSP rose, a rebalancing in the voice market started to happen: as usage fees went down, line rental charges went up.

Today, a fourth layer is added: IP, enabling OTT services (VoIP, IM, unmanaged IPTV). Unbundling appears to be too expensive for most challengers, but OTT brings a new form of competition, at least in the services space. Infrastructure-based competition is reduced to copper (upgraded to fiber) vs. coaxial (HFC). A rebalancing is going on, as traditional managed services are being replaced by non-managed OTT services. The new distinction is between service revenues (dropping) and connectivity. Limited infrastructure competition may lead to rising connectivity prices. Especially when the infrastructure players not only see services revenues dropping, but at the same time investments must be made in NGA networks (FTTH, LTE, WiFi). Hence, they are asking for a regulatory holiday to first roll out the NGA and accept regulation at a later stage.

In the services domain, net neutrality rules are designed to protect the OTT players in order to create a higher level of competition. Looked at it this way, other regulation is no longer needed.

That leaves lots of questions regarding connectivity:

• Is two enough in fixed-line competition (copper, coaxial)? In mobile, is three enough?
• Is LTE a fixed-line replacement? Is WiFi a mobile replacement?
• Is infrastructure a natural monopoly? Is it really a utility, such as water, gas, sewer, electricity?
• Is structural separation the answer? Is regulatory symmetry needed, i.e. structural separation of cablecos as well?