Superfast broadband regulation will differ from first generation broadband

At last week’s Westminster eForum conference on the future of Broadband in the UK, Stuart McIntosh, Ofcom’s Partner for Competition, explained how regulation for superfast broadband would be different from what we had seen before.

In the Telecoms Strategic Review, Ofcom was determined to press for infrastructure competition “at the deepest level possible”. It did this by encouraging Local Loop Unbundling, not least through massive reductions in the wholesale price. The higher levels of investment required necessarily led to a series of takeovers and mergers, and the result in the much-consolidated industry we see today. Ofcom argues that this has led to a much more competitive market, and that competition has led to greater investment.

For superfast broadband, however, they are taking a different view. Firstly, although there is no suggestion of regulatory “forbearance” for BT, Ofcom have said that wholesale prices can reflect risk. And because it sees the economics of fibre roll-out as being more challenging, Ofcom is putting more emphasis on “active” wholesale products , rather than “passive” ones – ie is expecting rather more service provider competition than infrastructure competition.

This leads to a series of interesting questions. How much margin will there be between the passive and active products (as this determines which is the better investment) ? What happens to the deployment of first generation LLU – are these now stranded assets ? If infrastructure competition was so successful first time round, but is not encouraged by favourable pricing this time, does this mean that we will get a less competitive market in superfast broadband ?

Speaking later, Andrew Heaney of TalkTalk insisted that unbundling was still the way to develop competition. It will be interesting to see to what extent he can persuade Ofcom of this.

But, anyway, to what extent will regulation will make a difference to BT’s FTTx investment. Isn’t it far more likely that BT would start blowing fibre very quickly indeed if it saw a big takeup of Virgin Media’s superfast broadband or saw the mobile operators bringing forward their LTE investments. However, neither of those yet seems to be happening in any market-changing way.

EU green light to state aid for rural broadband

The European Commission has adopted Guidelines that will help Member States to accelerate and extend broadband deployment, allowing public support to foster investment in this strategic sector without creating undue distortions of competition.

Competition Commissioner Neelie Kroes said: “ The Guidelines will facilitate the widespread roll out of high speed and very high speed broadband networks, enhancing European competitiveness and helping to build a knowledge-based society in Europe."

The guidelines distinguish between “white areas” (rural and underserved area) where support for broadband network deployment is in line with existing Community policies and “black areas” where at least two broadband networks are present and where State Aid in not required. Typically, there are also “grey areas” where there is a need for a more detailed assessment.
Last month the EC gave the green light for plans by the Welsh Development Agency (WDA) to construct an open, carrier-neutral, fibre-optic network to wire up 14 Welsh business parks in North Wales.

NetStrategics can help planners work through the detailed conditions in the Guidelines – contact us on huw.williams@netstrategics.co.uk

£2m available for Digital Britain projects

Funded by the Department for Business Innovation and Skills, the Technology Strategy Board (TSB) is planning to fund at least 80 projects on Digital Britain, with a total budget of £2 million. The TSB will fund 75% of feasibility studies proposed by SMEs, small or micro businesses, costing up to £33,000 of innovation in business models, applications, services and technologies.

But if you want to get your hands on this money, you’ll have to move fast – the closing date for proposals is noon on October 1st – and not a minute later.

Creditably, you only need a one page proposal, but you will need to make sure that is well written, concise and compelling, and that the market opportunity is clearly set out. Most importantly, you need to show how the proposal aligns with the scope of the programme:
· Economics of the network
· Economics of content and services
· Access, protection and enablement

One of the four priority areas which the TSB is particularly interested in is “Cost-effective deployment and operation of digital infrastructure”. This is looking for feasibility studies which offer ways of overcoming the cost barriers to next-generation infrastructure development, eg:
· Community initiatives to increase broadband access in a way that reduces costs of deployment
· Ways to reduce the amount of energy used to run telecoms networks
· Ways to reduce running costs of networks

The other priority areas are:
i. Enabling technologies for the internet: core functional technologies that help with areas such as meta-data management of content, revenue distribution and payment processing, quality of service control, personalisation and privacy, or management of data within the home
ii. Access to public service information: eg how to increase accessibility to and public engagement with online public services
iii. Applications and services - ”other”: eg new models for distributing and managing digital content, such as those based on metadata; trusted services models; personalised services and interfaces.

NetStrategics attended the BIS briefing session yesterday, and can help you pull together your proposals. Contact me at huw.williams@netstrategics.co.uk

Telecoms Regulation: Telecoms Regulation: Do Stephen Carter's numbers add up ?

Telecoms Regulation: Telecoms Regulation: Do Stephen Carter's numbers add up ?

My reply to LIndsey was:

"Hi Lindsey,

Thanks for your query – it’s nice to know people read some of the stuff we write !

Interesting that you point out that 27.2m is probably a high figure. Actually I received today Ofcom’s latest market data (see attached). That gives a figure of 23.5m fixed residential lines and 9.5m business lines.

As you rightly suggest I made the simplification of number of premises = number of lines. It could in fact be higher or lower – premises without lines, and multi-line premises. With ADSL, I think we are seeing fewer of the latter. If you do make the simplifying assumption, then the actual figure doesn’t matter much as it is a factor in both the revenue side (N*£6) and in the cost side, and so drops out.

Of course this has all become a little academic, as there is no prospect of the £6 levy being in place before the election, and there is little sign that the Conservatives (who I guess must be odds-on favourites at present) would give this priority.

So I don’t see any nationwide roll-out any time soon. BT will go as far as it can, and CBN groups will try to pick up the slack. My interest is how one can make business cases for those trials work – I think the involvement of local councils who may be able to justify including other benefits may be the way to crack it.

Happy to talk more

Huw"

Telecoms Regulation: Do Stephen Carter's numbers add up ?

Telecoms Regulation: Do Stephen Carter's numbers add up ?

Lindsey Annison sent me the following comments:

"Disclaimer: I am making no claims to being a mathematician or accountant, and like to keep things simple. ;o)

In your blog post about Carter's figures, you use Analysys Mason's figures of 27.2m. That is landlines IMHO not premises. I spent hours on the phone to ONS etc and was repeatedly told 20m homes and up to 5m max business premises. (This figure is very ahrd to determine as there are so many farms, SOHOs, home businesses etc apparently who could feature in both figures)

The AM figures imply at least 2.7m second/third lines but it would be VERY interesting to get the true number of multiple phone lines into single premises from BT et al.

If you repeat the figures using 20m, then it comes to £2bn to do the final third with FTTH and 36% take up. If each of those homes were paying, for sake of argument, £30/month eg £360 pa, the revenue generated in year 1 alone would be £2.6bn (by my maths). On a standard telco/infrastructure model, payback would be over 10 -15 years so I cannot begin to see how this can't be justified easily.

To continue, no-one in their right mind is going to go into a region/community and deploy fibre without passing every home/premises where at all possible. Lessons learnt from NTL!! So, whilst in year 1 take up may only be 36%, in rural communities such as ours, by year 2, you would have picked up the majority of users, except the digitally reluctant, and could possibly double the 36% without too much grief. That second wave of subscribers would only therefore need kerb/gatepost to home connections, with related costs approaching zero, particularly if the householder does that bit themselves as in the Nordics.

So, do you fancy expanding on the maths for FTTH and disproving that £28bn and showing just how feasible the final third is?

Regards
Lindsey"

Do Stephen Carter's numbers add up ?

The Digital Britain report proposes an annual fixed line levy of £6 to fund the "final third" of fast broadband rollout. So we thought we'd look at how far that would go.

What will the last third cost to build ?
· Assume 27.2m fixed line homes.
· A report for the Broadband Stakeholder Group by Analysys Mason (fig 5.1) suggested that FTTC costs for last 16% of homes are £1175/home connected, with 36% take-up assumed= 27.2*16%*1175*36%= £1.8bn
· For next 17% homes (taking us to 33%, the last third), cost per home connected is £573, take-up assumed 36% again;
· = 27.2*17%*£573*36%= £1.0bn
· So total “last third” cost = £2.8bn

How much money is raised ?
The Universal Service Fund comes to £6 * 27.2m = £163m a year.

Does that add up ?
We have a choice of approaches.

a) We could assume that BT would contribute to the last third at the same level as the first two-thirds, with the Fund paying the rest. Taking the 2/3 cost (£400 ) as a break-even per home connected, that would make BT’s contribution to the last third = 33%*26m*£400 * 35% = £1.3bn., leaving £1.5bn to be covered by the levy. Payback = 9.2 years. Plausible, just about.

b) Alternatively you could say that BT would earn revenue on the last third that it would not otherwise have done. If we allow the levy for 10 years we get £1.6bn, leaving £1.2bn to find from 3.2m homes = £370/home connected over 10 years = £3/month. Again just about possible.

So overall one could say that £6 was a fairly well judged level for the levy. The problem might come if other groups take some of the levy for one-off ventures which don’t then get integrated. Or if the take-up assumption is too high.

Personally, I’d say this still looks a risky proposition.

Pole Tax, anyone?

The Digital Britain final report emerged yesterday to muted fanfares. We summarise our initial take on the key points here as they relate to telecoms.

The overall tenor of the report might be described as modestly interventionist, with "industrial activism" and "modernisation" as recurring catch-phrases. However, there are few signs of grand projects and those we were expecting - universal broadband now (or soonish), next generation broadband later, re-jigging the funding of broadcasting - are all quite modest in scale and funded from bits and pieces here and there. Of course there is a sprinkling of Czars, including Martha Lane Fox of former Lastminute.com fame as Champion of Digital Inclusion, though the report stops short of crowning them as such. There are no Dragons or other professionally grumpy reality TV stars that we could find.

In relation to telecoms, we see the following main objectives spelled out in the report:

1. Preventing exclusion - skills, affordability, motivation;
   
2. Promoting access to current generation broadband (the broadband Universal Service Commitment);
   
3. Ensuring that next generation broadband reaches otherwise uneconomic areas (Next Generation Final Third project).

1. Preventing exclusion

Key proposals:

• Home Access scheme - content and skills development for children, young people and their families - currently in pilot in Suffolk and Oldham - £300m budget - plus industry initiatives from Microsoft, UK online (DfES), second-hand computer schemes etc.
• Digital Inclusion Programme - under the auspices of the Digital Inclusion Champion, backed by an Expert Task Force and in cahoots with the (already proposed) Digital Inclusion Consortium. It is not yet clear what they will do, other than "move toward" a National Plan for Digital Inclusion and, maybe, merge with various other bodies into a Digital Inclusion Agency at some later date.
  

Budget: not specified.

Winners:

• The quangocracy, would-be Champions
• The "corporate responsibility" industry
  
• Digitally naive young people (if any)
  
• The poor (maybe)

Losers:

• The digitally reluctant.

2. Promoting access to current generation broadband (the broadband Universal Service Commitment)

Key proposals:

• Revise universal service obligation (USO) legislation and license authorisations to extend them from narrowband to broadband
• Establish a "delivery body" (Network Design and Procurement Group) with powers and technical expertise to procure not-spot solutions on a technology-neutral basis - CEO to be appointed by the end of October 2009
  
• Twist the arms of the BBC Trust and BBC Executive to cough-up the money left over from under-spending on supporting elderly people and others as the switchover of TV broadcasting to digital proceeds
• Pass the hat around interested corporations, local authorities, regional development agencies and the like to get additional funding and contributions in kind

Budget: £200m from the Digital Switchover Help Scheme underspend and Strategic Investment Fund combined. The rest not specified.

Winners:

• Not-spotters
• BT - will probably get most of what's going
• Mobile operators - might get some at the margins
• Virgin Media - might get some at the margins
• Local self-help initiatives (e.g. rural/village wi-fi/Wi-Max ventures) and similar

Losers:

• The elderly and confused
• The TV-switchover-support industry
• The BBC - but they have known since at least the first PSB Review that the money would probably be ring-fenced

3. Ensuring that next generation broadband reaches otherwise uneconomic areas (Next Generation Final Third project)

Key proposals:

• Impose a 50p/month tax (the Next Generation Fund) on every copper line (including coax) to fund extension of high-speed broadband (FTTx, or equivalent) to the "final third" of the country that would otherwise be uneconomic to serve. Operators will be responsible for collecting it and remiting it to Ofcom
• Allow operators to bid on a technology-neutral, reverse auction basis for tenders, which will be managed by the Network Design and Procurement Group (see above)
• Amend the Communications Act 2003 to make the promotion of investment in communications infrastructure one of Ofcom’s principal duties alongside the promotion of competition

Winners:

• Crofters, farmers, second homers, rural retreaters, owners of moats and anyone else in the final third
  
• BT - will probably get most of what's going
• Mobile operators - might get some subsidy at the margins and may benefit from some increased defections from fixed lines
  
• Local self-help initiatives (e.g. rural/village wi-fi/Wi-Max ventures) and similar
• Probably not Virgin Media, as relatively few of the final third areas seem likely to be sufficiently adjacent to their existing footprint
  

Losers:

• Anyone with a copper line (including, it would appear, a hybrid fibre/coax or fibre/twisted pair FTTC one)

What about mobile?
Key proposals:

• Existing 3G licences will be made indefinite
• The Administrative Incentive Payments (AIP) structure (annual fees paid by spectum owners) will be adjusted to achieve greater fairness, though how is still to be determined
  
• The 800Mhz "digital dividend" from shutting down analogue TV, together with the 3G expansion band will be auctioned off in 10Mhz blocks
• Appointment of the Independent Spectrum Broker to manage the above (ISB - already in place - his report was published on 13th May 2009). It is proposed to implement his proposals.
  

It is envisaged that this will lead to mobile broadband download speeds of up to 100 Mbps being available in urban areas and 5-6Mbps elsewhere.


In conclusion

On the face of it the report might be accused of a lack of ambition, particularly in setting the universal service criterion as low as 2 Mbps and with a relatively leisurely progress towards high-speed broadband. Perhaps understandably in current economic circumstances, it avoids extravagant spending commitments, or almost any spending commitments, to the extent that we wonder whether even its modest ambitions are realistic given the amounts proposed, for example the 50p/week/line tax in relation to the billions said to be required for next generation broadband. However, we'll return to that topic in a forthcoming post!

Regulatory Holidays

Well it's a timely discussion, despite the rain here in the UK, with the "Digital Britain" report due to be published today.

As I see it, there are two things to bear in mind here - the problem and the proposed solution.

First, the problem. FTTx networks are being installed in many places around the world by incumbent telcos, cable operators and newer challengers alike without any special regulatory inducement. The trouble is that it seems that the economics of FTTx make it unlikely to be profitable to cover the whole population. This cuts across political objectives such as regional policy and plays to a fear that sections of the population will be excluded from some as-yet-undefined, but essential, social and economic activities.

So the politicians and regulators must either appeal to a patriotic consensus, as seems to have happened in some Asian countries, such as South Korea, or they must provide incentives to the market to produce what they want.

As Andrew Sharpe suggests in his blog, "not interfering" looks unlikely to work, given the economic issues described above. For incumbent telcos, though, the holiday bargain they seek is freedom from downstream competition. In other words, in exchange for making an unprofitable, or marginally profitable, investment in their (upstream) network business, they get to avoid downstream competition for retail customers, enabling them, or so they hope, to extract monopoly profits for at least long enough to repay their investment.

But regulatory holidays, like real ones, are seldom as free from the normal constraints of life as we hope and may cost more than we plan. For those who would not otherwise get high-speed broadband, it might seem like a reasonable deal - monopoly service, probably at a regulated price, is better than no service. But to the rest of us, there is a clear risk that what is, at least here in the UK, a highly competitive and fast-moving industry might turn into a sluggish monopoly.

Of course one might try to draw a distinction between profitable and unprofitable areas and set the rules accordingly. But it seems inevitable that this would lead not only to lots of arguments about what and where is profitable, but also to the perverse result that monopoly high-speed broadband would be imposed in just those areas where there is least competition for the current generation of broadband.

There are, of course, alternative solutions, such as allowing the incumbent to pass on more of the costs where they are higher, setting up a universal service fund and allowing operators to bid for subsidies, or even taking on the whole project, as is happening in Australia with the National Broadband Network.

Note: this post was published earlier in substantially the same form as a comment on a LinkedIn article. It is re-posted here for the benefit of anyone who is not a member of LinkedIn, and of its Telecom and Media Regulation and Public Affairs group.

Mobile Skype Update 2: Walking Slowly Backwards

According to a report in Total Telecom, T-Mobile Deutschland is now offering to charge its customers EUR9.55 per month to use Skype on their iPhone or other mobile device. This is instead of banning such a transgression outright. According to Total Telecom:

'A Deutsche Telekom spokesman said the company has to make "significant investment" in its networks and the number of available Internet protocol, or IP, addressees to offer its customers the option to use VoIP within its mobile network in Germany. However, the spokesman declined to elaborate further on the details of this necessary investment.'

Ironically, it would seem, one of the reasons that operators are moving towards all-IP networks and new generations of technology such as LTE is that this will reduce the costs of carrying voice calls. In this instance it appears that either the costs of carrying VoIP are higher, or that T-mo is looking to recoup revenues it might have received had the calls been made over its GSM network.

NGA projects still looking for the money

The Next Gen Roadshow at Basingstoke this week, organised by the Community Broadband Network, was another excellent set of presentations about the exciting NGA developments around the country, featuring the Gateshead, Fibrespeed Wales, Bradley and eHampshire projects.

But even amongst the audience of committed enthusiasts for NGA, for whom it can sometimes seem more like a religious quest than a commercial activity, some notes of caution were being sounded by those whose role it would be to convince investors to loosen their purse-strings. It seemed to be fairly generally accepted that standard commercial business cases would not fly without some other funding, so looking for justifications has become the name of the game.

Ed Vaizey, the Shadow Minister for Culture, wanted to “encourage” local community initiatives, and was not happy with the Digital Britain proposal of only a 2Mb/s USO, but he was far less keen on any central government involvement. It appears that an incoming Tory government would be even less likely to fund NGA development than the current one in these straitened times.

There are still some “build it and they will come” technology enthusiasts around, but there were also some very much more practical suggestions as to how to fund the investment:

• Local authority-led projects could use the “externalities” of savings elsewhere – eg on transport, in the NHS etc – to add extra benefits into the case; avoiding the problem of budget silos is the main challenge here
• Looking to the examples of the US and Australia where even in these free-market conditions, state funding looks to be favoured
• “MUSCOs” (multi-utility service companies) could be a way of reducing the highest cost element, the civil engineering, by sharing it across several services
• new business models which change the relationship between end user and content provider (the so-called JON model, which aggregates patchwork developments)
• integrating NGA into wider local planning decisions on infrastructure
• requiring property developers to install NGA on all new build plans, or at least to install open access ducts
• bringing communities together to have an ownership and interest in the local services (ie increasing take-up and penetration)
• or even, as in Bradley, use local farmers to dig up the roads more cheaply (the “Bradnet” speaker seemed to be suggesting a protection racket with the electricity company – “our tractors do seem to be damaging your overhead lines a lot, so why not build a new underground duct” !!).

Adroit Economics shared their views on developing the business case in a way that gets through the bureaucratic process. But each case will still be a challenge, and will need some fairly fancy footwork to show a positive result.

Mobile Skype Update

The antipathy of some mobile operators to their customers using VoIP services like Skype over their networks (see our earlier post) looks set to heat up further. UK operator 3 has announced that from May 1st 2009 it will offer Skype-to-Skype calls and instant messages for free over its data network. It is not clear from the announcement whether users will be able to make calls to and from the public telephone network (i.e. involving normal telephone numbers), for which they would presumably pay Skype, rather than 3, though other commentators have suggested that this will not be possible.

Perhaps more importantly, 3 plan to make the service available over the summer to anyone with a compatible and unlocked 3G phone - in other words to users of competing networks. Presumably the thinking is that once a user has a 3 SIM card in their phone, it will be easy to persuade them to take additional paid-for services. Despite 3's claim that "Skype is only available for free with 3 because we don’t think you should have to pay for mobile phone calls anymore." - an unusual sentiment for a mobile phone company - this would probably include paid-for calls, since this is likely to be the only way to reach people who don't have a Skype account, or are not online.

It will be interesting to see how people use this new service. One option would be to put the £1.99 SIM from 3 into a spare, or second-hand, phone for separate Skype use, to avoid having to swap SIM cards. This would be less promising as a basis for enticing Skype-only customers into taking other services. Of course another option for someone with a reasonably high-spec phone is to use a service like Fring, that runs as an application on the phone and enables Skype or other VoIP calls to be made over mobile or WiFi networks without changing the SIM card.

CARTER HAS A CHALLENGE ON HIS HANDS AS GLOVES COME OFF IN DIGITAL BRITAIN DEBATE

Lord Carter has received over 200 responses to his interim report on Digital Britain, and now faces the challenge of reconciling many different views and standpoints without recourse to primary legislation and without legal challenge. Responses come from across the spectrum (apologies !) of the business, with the creative industries (“poets”) outscoring the telecommunications industry (“plumbers”) on the list of respondents published on the DCMS site.

I reckon these responses break down as:

Commercial telcos/ suppliers
12 responses; BT, O2, Vodafone not listed, presumably confidential responses

Creative industries – commercial
13 responses; similarly the main broadcasters (BBC, ITV, 4) not listed

Communications Industry groups
18 responses, including engineering groups

Councils/RDA/Community groups
14 responses; surprisingly several Community Broadband Network groups are not listed; includes Upper Deverills Parish Council !

Creative industries - industry groups
34 responses - the most active group; wide range of organisations covering film, TV, print, radio, libraries

Public interest organizations
3 concerned about rights, 1 about security and 1 child protection

Unions/political parties
5 unions and the Green Party

College/research groups
3 responses

Individuals
14 including two responses from academics and two from MPs

Others
7 responses; eg British Space Centre

At a macro level this represents a lot of different standpoints at different places in the value chain – a nightmare to resolve. But even within distinct parts of the market there are deeply entrenched views. Here are a few comments on those responses I’ve managed to get through so far – contact me if you want more.

“PLUMBERS”
No way are Vodafone and O2 going to give up spectrum without a fight. Despite the best endeavours of the ever-charming Kip Meek from BSG, this one looks like going to the wire. In its tussles with the regulator and Government, BT eventually learned that short-term wins often translated into longer-term problems – this penny has not dropped for these guys yet.

BSkyB wants Virgin Media to open up its network by offering wholesale products, are against public subsidies for USO and want duct sharing. BT will have pointed out the practical difficulties of duct sharing and will be wary of a USO fund (they’ve played that sort of game before). Virgin also favour a market-led approach, but “keep your hands off our network”. The Number (118 118) are more concerned about service provider competition, good wholesale products and Voice over Broadband.

“POETS”
Here the Channel 4/PSB issue is a key focus of debate. Sky and Guardian Media Group (GMG) want controls on the BBC and a market-led approach to PSB. Five is trying to hang on in there with the idea of linear TV and its PSB role (keeping its C4 arguments behind the scenes). The NUJ wants the spectrum released from the Digital Dividend to be earmarked for the PSB. The Beeb’s response is not on the DCMS site, but SamKnows reports that they are keen on playing a “central role” in partnership with other media players, opening up iPlayer for other broadcasters.

Carter’s proposal for a Rights Agency gets a lot of attention. There is almost uniform agreement that piracy is bad, that protecting rights is essential to ensure investment in creative industries. The Design and Artists Copyright Society is concerned that small players will lose out. The “Alliance against IP Theft” ( a collection of 21 organisations mainly focused on the film industry and video games) want a clear role for the Agency (focused on illegal downloading), but for commercial issues to remain managed by the private sector. Even the Premier League get in on the act, demanding protection for their IPR and looking for the Rights Agency to be given clear direction.

GMG also raise the issue of value disappearing to search engines and other aggregators and want Carter to help them keep control of some of this.

COMMUNITY GROUPS
The views of community groups on network issues are more consistent: “we must have superfast broadband”; a “digital divide” or “two-speed Britain” is a bad thing; “the broadband USO does not go far/fast enough”; and “BT won’t do it, so Government should fund it as a means of economic recovery”. Digital Birmingham argue for public investment in duct; eHampshire want support for local community networks and for Building Regulations to insist on fibre installation in new homes; the RDAs suggest public sector procurement as a way forward; and Upper Deverills Parish Council are using all their influence to press for a faster USO.

THE FREE-THINKERS
There are enthusiasts for 4G and internet radio, concern over the problems of migrating to DAB, and demands for better funding of talent development. The Green Party want mobile base station sharing to reduce energy use and spectrum allocation which allows energy-efficient solutions.

So best of luck Lord Carter – there’s no way to please everyone. Personally, as a “plumber”, I find the “poets” arguments generally self-serving, idealistic and uncommercial, when sharing value with those building the networks has to be the only way forward. However, as the media likes nothing more than talking about itself, I’m sure that’s what we’ll be hearing most about in the coming months.

Banning Mobile Skype

T-Mobile has reportedly threatened to disconnect users of the iPhone in Germany and four other European countries where it has a distribution deal with Apple for the “Jesus phone” if they download and use the Skype application. This is not the first time that T-Mobile have encountered adverse publicity for blocking, or attempting to block, the use of VoIP by users of their service. However, in this case the application only works over the iPhone's connection to local WiFi networks and not via T-Mobile's data service. The operator's suggestion that there may be issues of technical compatibility seems rather unconvincing and is denied by Skype, making the bad publicity worse still.

It is entirely understandable that mobile operators should be concerned about customers whose expensive handsets they have subsidised rendering that investment worthless by avoiding paying for calls. A top-of-the-range iPhone sells on eBay (Skype's parent company) for around $630, though presumably an operator would pay somewhat less and European mobile operators such as O2 in the UK are prepared to give their subscribers one of these for free, in exchange for a hefty £44+ per month subscription. Apple's deal with their franchised network operators unusually involves them getting a share of network revenues and perhaps it is for this reason that they have ensured that the Skype application is limited to calling over WiFi, rather than over 3G or other mobile data networks.

Thankfully for the mobile operators, their immediate predicament is scarcely dire. For one thing, the customers with whom the risk is greatest, those whose handset is heavily subsidised, have (like O2's well-heeled, or gadget-crazy, £44+ per month set) already committed to pay for their minutes whether they use them or not. Even pre-pay customers, who will have paid nearly £400 for a 16Mb 3G iPhone, are likely to find it more convenient to make their calls in the normal way over the GSM network. Perhaps it is for this reason that some mobile operators, such as Vodafone in the UK, have apparently so far refrained from blocking or forbidding the use of VoIP over their networks. Others, such as Huchison's 3 UK have come to commercial terms with Skype and made a virtue of it. Even those who use a VoIP application that has not been blessed and taxed by the operator, such as Fring or Gizmo, may find themselves paying a not-insignificant amount to their operator for the data connection.

Nevertheless, as mobile data becomes cheaper and faster and as the VoIP applications become slicker and better-integrated with the phone's basic functions such as call buttons and directories, very large amounts of currently profitable revenue from both voice calls and text messages are at stake for the mobile operators. This is underlined by over a million downloads of the iPhone Skype application in its first two days - making it the number one download from the App Store in 40 or so countries around the world, including Germany, according to Skype.

T-Mo is not alone in blocking the use of Skype and other VoIp services on their networks through technological and contractual means. So do all the other mobile networks in Germany and their French counterparts do the same, as does AT&T in the US, raising calls for regulatory intervention and not just from the likes of Skype. The VON Coalition, for example, a pressure group which includes, amongst others, BT, Microsoft, Intel, Cisco and Google (and, at least as recently as last year, T-Mobile USA), reportedly argues that

"Blocking of voice applications on mobile devices, such as the announcement of T-Mobile to block Skype on iPhones in Germany, is highly detrimental for consumer welfare in Europe".

The VON Coalition describes itself as:

"Member supported coalition of service and software providers and equipment manufacturers organized to advocate and educate policy makers and regulators the viewpoint that the IP Telephony industry should remain as free of governmental regulation as possible."

Never mind the potential irony of such a body calling for regulatory assistance, the tenor of arguments so far advanced is that of net neutrality, or as Robert Miller (Skype's General Counsel) puts it:

"Skype passionately believes that consumers should be entitled to access an open Internet on a variety of devices and on fixed and mobile connections to the Internet."

Unfortunately for them, network neutrality seems to have failed to ignite the same degree of emotional intensity in Europe as it has in the US - perhaps because Europeans believe that if their ISP restricts their access to information or applications unreasonably they can always switch to another one. And, as Miller wistfully points out, current EU legislation in front of the national Parliaments would not help much, requiring no more than that service providers inform their customers first if they are going to restrict traffic in this kind of way.

Whilst the network neutrality debate is probably not yet over in Europe, it might be worth considering whether there are other red rags to the regulatory bull here. This would very probably turn on whether each national regulator deemed that the network operators had Significant Market Power (SMP) in the relevant market (and there might be some debate about which market that would be) and, if so, whether blocking or forbidding access to VoIP services is an abuse of that power.

One problem is that the most likely Market, as defined within the Framework, is Access and Call Origination on Mobile Networks, which was deleted from the list as part of the 2007 reforms, meaning that it is not a requirement for national regulators to carry out regular reviews of the extent of SMP and of the remedies they should apply. It does not mean that EU and national regulators will not take action, though, as has recently happened with the prices charged for calls when one is outside the country in which one's phone service is registered. But action would most likely only happen if regulators are spurred on by public concern and lobbying.

Network operators, for their part, are likely to argue (again) that the loss of profits they make from calls and texts would lead to them cutting back on investment and force them to raise prices, forcing vulnerable consumers off the network.

The glass-half-full view would be that the regulators are (implicitly) right and market forces will not allow what consumers want and technology allows to be blocked by suppliers for very long. After all, T-Mobile's earlier apparent démarche in the UK and the indignation surrounding this latest incident suggest that using restrictive contract clauses and network blocking to strong-arm customers away from using VoIP has about as much chance of longer-term success as the record companies have of stopping illegal copying and downloads of music tracks by brandishing copyright laws.

Pay-back for Functional Separation?

The end of last week saw the publication of three long-awaited and weighty consultations on the future regulation of voice telephone services over fixed networks. The headline summaries where this seismic event was reported in the press centre around BT becoming free to bundle telephone services with broadband and TV. But we see plenty more issues lurking below the surface.

In essence, following the 2005 Telecoms Strategic Review (TSR) the deal struck by BT with its regulator, Ofcom, was that in exchange for BT undertaking to semi-detach its copper local access network (now Openreach), Ofcom would not force BT to separate this activity completely and would allow BT some unspecified degree of extra freedom in the retail (direct to consumers and businesses) market.

Well, so far Openreach is up and running and has been steadily moving towards providing fully equivalent treatment to other communications providers (CPs) and to the rest of BT in relation to local loop services, including taking responsibility for Local Loop Unbundling (LLU), which enables CPs to rent BT's access lines and to connect them directly to their own networks instead of to BT's.

But there has been little in the way of relaxation of the rules. The main reason for this is that Ofcom can, under EU Law, only make changes of that kind following a thorough and objective review process. In principle, of course, this makes it pretty meaningless to include it in a deal. So either the review process is not as thorough and objective as it might be, or the market has changed anyway (the previous review was done in 2003), or (Ofcom's preferred explanation) functional separation has been a rip-roaring success in promoting competition.

So what about the other two consultations? Well, a handy safeguard for a regulator withdrawing regulation from a retail market is to keep a steady eye on the upstream market. In other words, a vertically-integrated firm like BT that sells both to end customers and to its competitors for those customers must not be allowed to hamstring those competitors with unfair practices when it sells to them. Hence the reviews of wholesale narrowband markets and of the charges that BT makes for those wholesale network services. In general, Ofcom sees increasing competition there also and proposes significant relaxation of the controls.

Brief summaries of what is proposed in the consultations below (usual devil-in-the-detail caveats apply):

Retail market review:

• BT no longer has Significant Market Power (SMP) in retail calls or lines
• Except ISDN, but who cares about that?
• So no more retail price caps
• And BT is free to bundle telephony with broadband, IPTV, or whatever.

Comment: This looks on the face of it like Ofcom straightforwardly delivering its side of the bargain. But Ofcom is a regulator, remember, so it's not quite that simple. In particular, Ofcom reminds us that the question of universal service remains separate from that of remedying the effects of market power. Which it is in principle, but in practice the existing retail controls were concentrated on the bottom 80% of the market and anyway the justification for universal service obligations is that the market (i.e. competition) is failing to deliver what the regulator wishes it would do for some portion of the population.

Wholesale market review:

• BT no longer has SMP in the transit and local-transit markets (which are now to be considered all one thing)
• But it does have SMP in call origination and termination and all CPs with access networks have bottleneck SMP in termination
• BT will no longer be required to offer Carrier Pre-Selection (CPS) or Wholesale Line Rental (WLR) in line with detailed and prescribed Functional Specifications. We think this could come as a bit of shock to some customers of those services!

Comment: The transit market is about carrying calls from one network to another. Local transit is where this involves a local exchange - one to which local lines are connected. This is the telephone network equivalent of motorways and major roads, where competition can most easily take root, because the traffic is already bulked up.

By contrast, collecting calls from and distributing them to local lines (call origination and termination) is less amenable to competition and, in practical terms, if you call me, your phone company will ultimately have no option but to pay my phone company to connect the call to me - a bottleneck, whether my phone company is large or small.

Of the various ways that have been devised for getting around the problem of getting competition into local networks, CPS and WLR are relatively cheap and easy for anyone wishing to offer a competing service to adopt. They involve using the incumbent operator's, in this case BT's, network to originate calls and provide line rental, respectively. CPS was only introduced in the UK in 2000 and did not really start to be a usable proposition for two or three years after that and WLR got going even more recently. However, Ofcom prefers LLU, because it drives competition deeper into the network, to borrow one of their favourite phrases. CPs have to invest more money and expertise to get it to work and they have more scope to make their service different and perhaps margin to compete on price. Since Ofcom find that CPS and WLR are mature services, they propose that detailed prescription is no longer warranted at the wholesale level.

Does this mean that the significant numbers of CPs still relying on CPS and WLR will find their business models obsolete overnight? We doubt it. For one thing BT has undertaken to provide equivalent products using its 21CN next generation network and Ofcom regards these new services (including Wholesale Voice Connect - WVC - which provides the equivalent of CPS and WLR, together with call termination) as being adequate replacements. It is also probably preferable for BT to keep its networks gainfully loaded with traffic, as CPS and WLR will tend to do and LLU will not. Perhaps most importantly, it might be regarded as a Litmus test of Openreach's independence that it should continue to meet demand from its customers without being obliged by the regulator to do so.

Network charge control (NCC) review:

• Price caps retained for call origination and termination, interconnect services (links, tie cables, work done and all that) and PPP (product management and planning), though the latter is RPI+0 to RPI+6.5, which is both pretty wide and a bit of victory for BT, on the face of it, since Ofcom and the OLOs have had a bit of a thing about this rather nebulous and overhead-ish category since whenever and Ofcom have had a new prod at it.
• No price caps on local-tandem and single transit (ST) - double + transit, involving several network hops, was already uncapped from last time around. So ST has gone from RPI-11.5 to nothing in one go, it seems - not exactly steady-hand-on-the-tiller stuff, some might argue.

Comment: This pretty much follows from the findings of the wholesale market review. However, a key linkage that remains to be made is with Ofcom's Mobile Sector Assessment (MSA), which will encompass potential changes to the charges made for terminating calls on mobile networks.

Mobile World Congress 2009

A few observations from meetings, exhibition and atmosphere at the 2009 Mobile World Congress in Barcelona.

 Main themes

Less hype, fewer people, less money, less WiMax, more of the same.

 Networks

-          Network spending in slowdown; mobile operators looking to get more from existing assets and less capex.

-          More agreement on that the roadmap from 3G through HSPA and its Revisions, then on to LTE (maybe initiall for hotspots, rather like initial 3G).  Much less talk of WiMax as an alternative to LTE in mature mobile markets.

-          Although the direction towards LTE has larger consensus, there is also agreement that capex limitations will push its implementation out further

-          Telstra in Australia making a big play of running 3G over 850MHz, so giving greater coverage, and upgrading rapidly through the gears of HSPA

-          Good explanation by Telstra of cost comparison between LTE and GPRS (LTE is approx 2% cost/bit of GPRS).  Also a possible new measure of base station efficiency:  kilograms per square metre per bit per second!

-          Telstra now claims SMS as less than 50% of data traffic

-          China Mobile pushing their TD-SCMA by trying to stress the importance of a roadmap of unpaired spectrum (on towards TD-LT(E))

-          Femtocells still something of a religion, led by faith rather than (yet by) reason

 Vendors

-          Blood on the carpet – a real sense of space and fewer people in the main exhibition hall for vendors

-          Chinese (Huawei, ZTE) even more of a presence than ever before.  This makes life awfully difficult for western-based vendors.  A quick Porter five-field analysis shows that the combination of intense industry (vendor) competition and strong customer (mobile operator) power puts great pressure on vendors’ volumes and commercial terms

-          Some vendors deciding to save cost and focus their activities via their pavilions, without taking up stand space in the halls (eg Cisco, HP)

 Devices and Operating Systems

-          All the consumer devices still in the shadow of the iPhone – which wasn’t even there.  Samsung (again) had a well set-out exhibition stand by theme (highdef multimedia, camera, music, comms)

-          Nokia starting to take a pop at BlackBerry (eg “BlackBerry tax” [the RIM relay]) to mask its own lagging in push email

-          Microsoft saying (again) it’s about to come good in mobile.  A slight irony that it is promoting itself as the platform of choice (slightly less ironic that a lot of appdev stands said “we’ve got our app working first on Windows Mobile, because that is easiest)

-          MS promoting Windows Mobile 6.5, partly in holding pattern till WM7

-          MS said that RIM’s and Apple’s vulnerability was the integrated nature of their hardware and software, and that the “open” Microsoft approach allowed more and more rapid innovation of device formfactor, price and features

-          MS claiming that Linux Mobile isn’t really “free”:  you incur costs for extra elements of the OS stack, eg photography, instant messaging.  These make it more expensive than paying the WM royalty (“which is less than the cost of the glass on the device”)

-          Market for devices is more sustainable at the moment at>$200 ex-factory cost.  This is growing a lot faster than cheaper featurephones

-          Qualcomm and Nokia have buried the hatchet on patent suits.

-          Hyundai entering the featurephone market??  They had a stand.  Maybe their satnav had broken down on the way to the Frankfurt Motor Show?

 Applications

-          Lots more booths with map-based applications (mainly GPS, rather than network-based)

-          More space (or maybe it seemed like that) with developers and providers of network optimising solutions and products, eg radioplanning, network management, sitebuild – ie reducing networks’ capex and opex

-          A sense that a lot of developers are at the same financial stage as last year

-          The nearest thing to hype at this year’s event was:  if you haven’t got an AppStore of your own, you’re in the wrong gang (at least for this year).

 Overall mood

-          Very quiet on the Monday.  More energy on the Tuesday, mainly in the developers’ halls

-          No sense of any major meaningful announcements

-          Could be some challenges next year for GSMA to persuade sponsors and booth-holders to stump up as much money

-          Very pleasant weather, so a relaxed atmosphere on the main outside areas

Broadband Speed - Disappointment Guaranteed?

An interesting post by Darren Waters, editor of the BBC News website's technology index. He has been monitoring his experience of broadband speeds on his Virgin Media "super highspeed" broadband service. For most applications the actual speed (ie how big the file is divided by how long it takes to arrive) is a lot lower than the headline speed of 50Mb/sec.

http://www.bbc.co.uk/blogs/technology/2009/02/speed_diary_day_five.html

The blog shows that the advertised headline speed is fairly irrelevant to the actual experience of an average customer, even when the provider can actually deliver such speeds reliably within the confines of their own network.

The limitations, especially in the newly designed cable broadband networks, are not at the access layer of the network (the wire from the local network node to the home). They are out in the internet world beyond.

It just goes to show that messages about headline speeds can only disappoint. Maybe it's time for Virgin Media to change their marketing, rather than fiddling further with their technology.

Digital Britain - interim report

Putting the Carter before the horse ?

Lord Carter’s interim report makes a good start at identifying action areas and key issues across the huge and varied arena of communications and broadcasting markets in the UK. But NetStrategics believes he has a long way to go before he can substantiate any real ways forward which will win general support – not to mention suitable funding ! There is more than a whiff of sanctimonious attitudes to digital inclusion and the UK content industry – the market should be encouraged to tackle these issues itself, and overall the report puts the cart of intellectual neatness before the horse of market complexity.

For a detailed critique of Carter's proposed 23 actions, please email me at huw.williams@netstrategics.co.uk

The Future of Communications

Telecommunications are traditionally a good lead indicator for the economy, and yet a recent poll published by BT suggests that broadband, mobile and home phones make up three of the top four things people would hang onto in a downturn.Whether or not this reflects a fundamental shift in cultural attitudes in a 24/7 connected society, the communications industry is faced with some seismic changes in technology, regulation and markets. It is far from clear how it will emerge beyond the current business cycle, but investment payback cycles in this industry can be measured in decades and some big bets are being placed by operators and their suppliers now.

So we recently got together with SAMI Consulting (St Andrews Management Institute), specialists in scenario planning, or “future-proofing”, as they would say. Together we mapped out some scenarios based on the world in 2015, which we summarise below.

The many interlocking trends and developments boiled down to two main dimensions of uncertainty: investment intensity (the amount of investment, or financial incentive to invest) and network fragmentation (how far networks and the industry nationally and globally continue to consolidate and work together).

Some trends seemed to us to be pretty inescapable, for example the move towards higher speeds of mobile and fixed broadband – we felt that 24Mbps+ would be pretty universal in the richer countries and many of the poorer ones too, whether the business case stacks up right now or no, just because there seems to be such a head of steam behind it. We couldn’t see a halt to the spread of pro-competitive regulation, with the European model and variants of it the dominant pattern. We also felt that the big infrastructure investments (particularly access networks) would gravitate towards the utility model, with regulation ensuring steady, if unspectacular, returns, though who would making the investments and reaping the rewards was less clear.

That still left many factors that seemed to us to be important, but uncertain. For example, will the arms race with the spammers, spitters, phishers, fraudsters, terrorists and other malware merchants escalate costs and disaffect people with the networked world? Would privacy issues lead to all kinds of fire breaks and fire walls, or even to activities moving off net? Would the content industries (music, film, sport, TV) get their acts together and evolve business models that enable them to be profitable and to drive consumer network use? What are the limits of advertising as a money source?

All this coalesced, with a bit of expert technical help, into four distinct stories for how the industry moves through and beyond the current recession and into the next business cycle around seven years from now. We’ll be picking up some of the themes in future posts, but if you would like to learn more about the scenarios, and what they mean for your business, please drop us a line .

Tiscali closes IPTV service - or services ?

Slow take-up of its IPTV service in Italy has forced Tiscali to close it down. Its difficult financial position and failure to agree a deal with BSkyB on its UK operations will no doubt have contributed to the decision.

So what is the future for Tiscali's UK IPTV service, based on the venerable HomeChoice offering it acquired back in 2006 ? Competition from Sky, Virgin Media and even BT Vision makes its prospects look rather bleak - maybe the HomeChoice guys would fancy buying it out again.

But what everyone must also be wondering is whether the lack of enthusiasm for IPTV in Italy will be replicated here. The answer will depend on how innovative the providers can be - simply copying Sky+ services will not be enough. How about "theme nights" - a package of Rocky movies and Muhammed Ali documentaries, or a ChickLit movies?

Huw