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

Virgin launches 50Mb/s service – first real test of NGA demand

Virgin Media has launched the first 50Mb broadband service in the UK, bringing the much-heralded world of Next Generation Access nearer. At around nine times the average headline broadband speed in the UK and over twice the previous highest 24Mb/s service, the launch of the 50Mb service offers the first chance to assess whether there really is demand for such ultra-high speed services. Clearly wedded to a “build it and they will come” strategy, Virgin Media are trusting that the early demand for their 10Mb/s and 20Mb/s services will translate into profitable demand for the even faster service.

But even Virgin seem to be struggling to imagine what customers will use such high speed services for. They suggest that shared accommodation of students would find it useful, that video-rich entertainment and social networking websites will require it or homes needing multiple HDTV channels. But surely that’s not enough to support such an expensive solution. And in a recession is £51/month (over £600 a year) really going to sell (when there are already early signs of people downgrading service), especially when you still have to pay for movie and sport content on top ?

The 50Mb is based on an upgraded network with current 10Mb and 20Mb users being moved onto the new "DOCSIS3" network, freeing up capacity for increased traffic on the existing DOCSIS 1.0 network. Quite what that means for the cost equation is debatable, but with luck it may be possible to regard this as an incremental spend and justify a business case on that basis.

Roll-out to the 12.6 million homes covered by Virgin Media's fibre optic network is expected to be complete during the Summer of 2009. So at the very least Virgin Media have put down a marker which may spur others to respond.