Daiwa EuroTelcoblog No. 70: Friday 20th August, 2004 - Sony and the voice game

This will be my last post for a couple of weeks, as I'm off for a much-needed break outside the blogosphere. I'll be back on 6th September, no doubt with much to cover. I've also been honored with an invitation to speak at a P2P Video symposium at Columbia University on 10th September in NYC, which will should yield a lot of interesting information.

Jeff Pulver's always interesting blog (http://192.246.69.231/jeff/personal/archives/001086.html) picks up a story from, of all places, New Zealand Reseller News (http://reseller.co.nz/news.nsf/0/CC256E690007D482CC256EF5000099A9?OpenDocument) on Sony's new software enhancement to PlayStation 2, which effectively makes the box a platform for voice/video IM services. The quote of note from the piece is:

"Although the product is mainly aimed at younger users, Sony believes its
VoIP capability will drive PlayStation into new markets as a less expensive
alternative to the telephone or PC for those wanting to communicate with
friends and relatives abroad."

This is yet another good example of device makers creating a platform for integrating voice service provision, but on the TV as opposed to the PC, as we observed some time back with the i2eye from D-Link (http://www.dlink.com/products/?pid=293). What distinguishes the Sony advancement is that it moves into a rapidly growing installed base of multiplayer online gamers. It also inevitably leads to questions about the potential for further integration of other features where Sony has vested interests (content, AV hardware).

Anyone interested in the phenomenon of Massive Multiplayer Online Gaming, or MMOG, should check out the interesting statistics in this frequently-updated site (http://pw1.netcom.com/~sirbruce/Subscriptions.html), which can also be downloaded in Excel format. The most popular game tracked, Lineage, shows about 2.7m subscribers in July. This is a significant target market, where MMOG players have been piecing together their own solutions for communication in the gaming environment (such as TeamSpeak http://www.teamspeak.org/_about.php) and these have increasingly offered richer presence functions (see Xfire http://www.xfire.com/xf/index.php). Having such a solution integrated into the PS2, with video included, opens up many possibilities, and will no doubt provoke a response from Microsoft.

Here again, variations on a familiar theme - voice as a product differentiator in the war between internet/media brands, with telcos in the crossfire.

Daiwa EuroTelcoblog No. 69: Tuesday 17th August, 2004 - Skype's psychological effect on the market

This time last year Skype was just about to go live, and remained pretty much off the mainstream industry map for several months thereafter. In my experience it is still not at all uncommon to meet people involved in the industry, in one way or another, who still have not heard of it. While it may not exactly be a household name, we have long believed that its psychological impact on the industry would be far greater than its user base might indicate. Today we get some empirical data from the excellent industry info portal and print magazine Total Telecom (www.totaltele.com), which is holding a poll for Most Influential Person in Telecoms 2004.

Last year's winner was John Chambers of Cisco, but in a sign of the rapid change washing over the sector, both VoIP champion Jeff Pulver and Skype founder Niklas Zennstrom are on the nominee list. What is perhaps more indicative of Skype's impact to date is the fact that, at this writing, Niklas Zennstrom is in ninth place, well ahead of Arun Sarin of Vodafone and Jorma Ollila of Nokia. It is our understanding that Mr. Zennstrom has so far received around half as many votes as Bill Gates (current number 2) and is just behind Eric Schmidt of Google, while Jeff Pulver is ahead of FCC Chairman Michael Powell, tied with Rene Obermann of T-Mobile, within easy striking distance of Ben Verwaayen of BT Group, and miles ahead of Ivan Seidenberg of Verizon, John Malone of Liberty Media, and Brian Roberts of Comcast. This is hardly scientific, but from a sentiment standpoint, it is interesting to see the guys who own monstrous global networks and hardware businesses being soundly thrashed by a couple of people working on voice as an internet application.

A full list of nominees can be viewed at http://wca.totaltele.com/poll/

Daiwa EuroTelcoblog No. 68: Tuesday 17th August, 2004 - Web.de enters the fray

German portal Web.de today announced that it is moving into consumer VoIP via a SIP-based offering (http://www3.freephone.web.de/?si=1bdCO.1bX3BJ.1wClVu.k**). What distinguishes this launch is that Web.de is neither a DSL access provider (as is Freenet.de) nor a broadband telephony service provider (like sipgate http://www.sipgate.de). It is a pure portal business, is profitable at the net level, generated cash in the first half, and has 275,000 paying customers signed up to its Web.de Club service (50k net adds in Q2). According to Nielsen//NetRatings data, Web.de was the sixth most popular site on the web in Germany in July, with a unique audience of 7.9m, making it the second most popular locally-generated market site after T-Online itself.

Web.de was among the first European internet players to grasp the potential of voice way back in October 2002 with the launch of the Com.Win product (see PTT Pulse issues 42 and 45 for our coverage), which has progressively added features, including most recently instant messaging. Today's announcement is a logical extension of the progress made to date. We will be interested to see what conversion rate the company can generate from its growing base of paying customers, and conversely what sort of leverage its position in the German internet market gives it in attracting new VoIP customers to be converted to paying Club members. Is this the sort of pressure which might prompt a somewhat more forthright defensive response from Deutsche Telekom, as we have already seen from France Telecom and BT Group in their home markets?

Daiwa EuroTelcoblog No. 67: Wednesday, 11th August, 2004 - Summer reading

This is one for the dedicated data-hogs rather than the casual beach reader, but UK super-mega-regulator OFCOM has just released its comprehensive UK market overview for 2004, and a cursory glance shows it to be packed with interesting graphics and data covering the telecoms, radio and television markets. The full document is here http://www.ofcom.org.uk/research/industry_market_research/m_i_index/cm/cmpdf/cm_2004.pdf.
Interesting headlines from our perspective:

• Real household expenditure on communications and media services now accounts for 4% of the total, up from 2.9% in 1999.
• Net weekly adds to broadband services are now pushing the 50,000 mark, up from 40,000 at the end of 2003, and OFCOM is observing that a greater proportion of those signing up are first time internet users, rather than merely narrowband migrants.
• 86% of UK households now contain at least one mobile phone.
• 21% of consumers identify their mobile phone as their primary means of telephony (up from 17% just two years ago), and 20m mobile users make a conscious choice at least once a week to make a call over a mobile phone which they could just as easily make on a fixed line.

Daiwa EuroTelcoblog No. 66: Tuesday 10th August, 2004 - Cable VoIP datapoints

Yesterday, in reiterating our UNDERPERFORM rating on Dutch incumbent KPN, we cited our primary concerns as being: 1) mounting competitive pressure in the domestic mobile market; 2) the lack of clarity surrounding the company's position in the various municipal fiber projects underway in the Netherlands and; 3) the VoIP spectre from cablecos. Last night's earnings call from UnitedGlobalCom (NASDAQ: UCOMA), parent company of UPC, gave us a couple of interesting new datapoints to contemplate on the latter point:

UGC yesterday stated that its residential trial of VoIP in Rotterdam had achieved a 22% penetration rate on the service with minimal marketing. Management stated that the strength of the response had encouraged them to accelerate the rollout and expand it to new markets, relegating its switched telephony business to a care and maintenance basis. They also commented that they believe VoIP will enable UPC to be price leaders in both bundled and standalone services. Service launch is set for Q3 (when VoIP will also be launched in Hungary).

Following the encouraging experience in Rotterdam, the company has identified six additional markets for VoIP introduction over the next twelve months. The company hasn't specified which markets these are, but we would guess that good candidates would be markets where the footprint is large and/or multiple service penetration is relatively weak. Our assumption is that these markets will include Austria, France, Sweden, Belgium, Norway, and Czech Republic.

Considering that UPC Netherlands has 2.3m customers and 2.4m two-way homes passed, a 22% level of uptake across its Dutch footprint suggests something like 510k VoIP subs over time. The company has fairly low penetration of both broadband subs (15.2%) and telephony (10.3%) in its Dutch footprint, so the appeal of having a teaser like VoIP to boost multiple service penetration is a compelling one. The ratio of revenue generating units (RGUs) to customers in the Dutch market is only 1.25, versus 1.59 in Austria, where the company acknowledges that its bundling strategy has been most effective. UPC Netherlands targets this level of multiple service uptake, which suggests that in one scenario the telephony subscriber base should in fact triple to around the 510k mark, with the broadband and digital cable subscriber bases each doubling.

Bandwidth and pricing are also issues where the incumbents will come under pressure from UPC. Starting with UPC Netherlands later this year, premium broadband customers will see bandwidth go to 8Mbps (with symmetrical an option at an additional cost), and the company is bundling other services at a discount of EUR8 - 15 depending on the relevant service tier. This sort of discount level is pretty material in light of a broadband ARPU of EUR45 across Europe.

Clearly there are a lot of complex issues relating to each individual market, and the ingredients of success will vary accordingly. However, yesterday's call left little doubt that VoIP is the principal prong in the UPC bundling attack, and is expected to drive significantly higher uptake of other services, as has anecdotally been the case in the earlier deployment from Cablecom in Switzerland. For the incumbents (not just KPN alone), the important message yesterday was that the largest cable player in Europe is bullish on VoIP and believes that the technology plays to its strength in other areas. Other, smaller cable players will be encouraged by this. As we have argued previously, for many telcos, adding the missing piece (video) of their own service bundle may be relatively more costly and time-consuming.

Daiwa EuroTelcoblog No. 65: Wednesday 4th August, 2004 - The other side of the broadband wireless coin

We spoke last week with IPWireless (www.ipwireless.com), to get a decidedly different angle on mobile broadband from our previous post on Flarion. Seen by many as the key competitor to Flarion, IPWireless is nominally a California-based company, with R&D and outsourced production efforts concentrated in the UK. Its traditional area of focus is UMTS TDD technology (also known as TD-CDMA, or 3GPP UTRA TDD HCR) originally using the 5MHz of unpaired spectrum awarded to carriers in the European UMTS licensing process of 2000 - 01. This has since been expanded, as the company has "rebanded" the technology to work in four other available frequency ranges, such as the 2.5GHz MMDS spectrum owned by Sprint and Nextel (which is also rumored to be trialing the IPWireless solution in addition to Flarion's Flash-OFDM), and also the 3.4GHz range, being employed by PCCW in its UK venture Netvigator (www.netvigator.co.uk). A number of other commercial deployments are up and running in markets as diverse as:

• New Zealand, where wireless ISP Woosh (www.woosh.com) claims to be taking about 40% of broadband net adds within its footprint;
• Portugal, where GSM operator Optimus and sister ISP Clix are adopting the technology as an alternative to what they view as a monopoly situation in the DSL market;
• Germany, where Airdata has spectrum coverage in most of the main cities (http://www.airdata.ag/173);
• South Africa, where state-owned broadcaster Sentech (http://www.sentech.co.za/) is assembling a footprint in major urban centers and, according to an article in Telecom Markets in late June, is planning on exploiting a loophole in its multimedia license to add VoIP to the mix.

IPWireless, using unpaired spectrum in a wider band than Flarion, claims double the capacity and effective throughput per cell sector in its 5MHz product (i.e., 6Mbps capacity and 2.5Mbps effective throughput) and a factor of four in its 10MHz iteration (being deployed by PCCW). This implies that a single cell site in the 10MHz network could serve something like 1,800 users with broadband connectivity, which in the case of Netvigator, costs GBP28 for 1Mbps and GBP18 for 512kbps per month (a c. 25% discount to existing DSL pricing in the UK). We think the pricing could go a lot lower, based on low greenfield build costs (sub $10 per PoP, we believe), fairly humble CPE costs (we think below $200 per unit and falling), limited marketing spend (Netvigator is anecdotally focusing on mobile demonstration pods and targeted advertising within its footprint), and relatively low payback threshold (PCCW got 40MHz of spectrum for only $12.6m). From public statements, PCCW currently offers service to 300k households, and plans 75% population coverage in the UK by year-end 2005. The roadmap beyond that is somewhat vague, but we expect that the service may evolve beyond mere broadband access over time. At the very least, it will have the same appeal as that expressed in the glowing reviews we have read of Nextel's Flarion trial in North Carolina - a robust replacement candidate for residential broadband technology of choice, but with mobility added in as an added advantage.

IPWireless partners closely with UTStarcom, which white-labels its products as the "Moving Media 6000" series (http://www.utstar.com/Solutions/Document_Library/Wireless_Documents/docs/3g/MovingMedia6000/DS_MM6000_DesktopModem.pdf) and is also in active development of handsets, expected in Q1 2005. This opens up interesting angles on how such a hybrid service might be marketed. For example, there has been much speculation regarding the plans of Softbank in the Japanese market, where the company has publicly discussed national ubiquitous coverage (this article published today states that the company claims to have obtained 13,000 sites currently and plans as many as 20,000 sites in place at service launch [http://www.itmedia.co.jp/mobile/articles/0408/04/news003.html?ec20 Japanese only], in anticipation of what many expect to be a mobile version of the disruption that Softbank brought to the domestic DSL market. Clearly, with DSL access speeds in the Japanese market already well above the peak level currently achievable with TD-CDMA, there may not be much business case for the technology as a residential broadband substitute technology.

In Europe, however, there is arguably more to play for as a residential/mobile hybrid, and the existing operators are sitting on the requisite 5MHz of spectrum in the appropriate frequency range as part of their UMTS licenses. It will be interesting to see what approach the mobile players take - for instance would O2 UK see an advantage in adopting a technology in the home market which enhances its mobile product while also opening up a position in the residential broadband market, where it is not currently active? What incremental revenue and customer retention opportunities might this open up, and what impact might this have on O2's position in the corporate market? Orange France, on the other hand, might see inherent conflicts with sister company Wanadoo, which is moving towards an IP triple play based on DSL, as well as its own ambitions in Wi-Fi. For the mobile units of integrated operators outside the home markets, however, the opportunities are probably closer to the issues we define in the O2 example above - retention, differentiation, and incremental revenues.

Alternatively, this may be one way for the independent ISPs to extend their product range into the mobile voice and data arena (Tiscali is already using UTStarcom for a DSL IP triple play deployment in eight European markets). In our view, their scope to do so is likely to differ considerably from market to market, depending on licensing terms, and also definitions of mobility itself. For example, would mobile access to TD-CDMA using handsets be considered mobile telephony, while laptop or PDA-based access would be considered mobile internet access? More fundamentally, some licenses, such as that of Airdata in Germany, explicitly forbid handover between cell sites. Besides causing further challenges for national regulators in defining and regulating services, we think the widespread availability of TD-CDMA and competing mobile wireless technologies will increase consumer choice (and price competition) through allowing new market entry and service bundling opportunities for the carriers, as well as dramatically expanding the opportunities for consumers to make use of IP voice communications applications.

Daiwa EuroTelcoblog No. 64: Tuesday 3rd August 2004 - No-nonsense VoIP

Sometimes it's easy to get carried away with the more futuristic and technical enablers of VoIP adoption (softphone clients, 802.11b handsets, embedded solutions, P2P architectures, alternative broadband access technologies) and lose sight of the fact that some of the most compelling applications may in fact be very simple from the consumer's point of view. The always excellent VoIP Watch (http://andyabramson.blogs.com/voipwatch/) alerted me to the existence of a new service called Planet ZivVa, which is an interesting case in point (https://secure.zivva.com/). Planet ZivVa allows users to map a "virtual" number in their home country (a SIP gateway) to a number in the US or Canada, thereby allowing friends and relatives in those countries to make unlimited calls to North America for the price of a local call. The service plan is priced at $29.99 per month, though a free trial is currently underway in the UK for a couple of weeks, or until the management is happy with the standard of service.

This product is very much US-centric at the moment, targeted at people from abroad who are living and working in North America. However, I signed up for the free trial here in London and basically used it in reverse, i.e., I mapped my parents' phone number in Memphis, Tennessee to a virtual UK number so that I could call them. The number I was assigned is in the standard 11-digit UK numbering plan format for London, but with the fourth through eighth numbers as zeros (020-0000-0xxx). It took three attempts to make a connection, but when I did we talked for 63 minutes with perfect quality and only the slightest hint of an occasional echo.

This is not the sort of VoIP-on-steroids product which we usually like writing about, and in many respects is merely a variation on what the calling card industry has been doing for years. However, it is simple, it works, and it plays havoc with the traditional rules of telecom as well as an exposed weakness in incumbent telco pricing strategies. In an attempt to retain customers and limit their exposure to revenue volatility, we have seen a growing emphasis on discounted calling packages across the European incumbents, which at their most extreme (e.g., the all-you-can-eat variants of BT Together, Carphone Warehouse's Talktalk and similar offerings from the cable players) offer unlimited national calling on an unmetered basis at any time of day or night (provided that an individual call does not exceed a defined length, commonly 60 - 70 minutes). It was probably not their intention in doing so to leave their international calling businesses open to cannibalization, but that is exactly what this sort of solution allows. Under Talk3 from Carphone Warehouse for example, my 63-minute call to the States using Planet ZivVa would cost me exactly zero, which is significantly better than any conventional Friends-and-Family scheme I have ever come across, and also cheaper than the very impressive SkypeOut.

In the interest of equal time, we have already seen some other interesting numbering-based arbitrage strategies in the VoIP market. One example is Stanaphone (www.stanaphone.com), which issues qualifying users (i.e., people with a credit card) anywhere in the world a North American number and 100 free outgoing minutes in the North American market plus a $2.00 monthly credit for international calling, as well as unlimited incoming calls. The Stanaphone business model seems to rest on "overage" charges, i.e., it assumes that users will overshoot their inclusive calling credits. Another example is the glophone from Voiceglo (http://www.voiceglo.com/webphone), which we wrote about some months back, wherein users receive a North American number plus four-digit extension. The glophone Platinum plan offers unlimited calling within North America and incoming calls for $24.99 per month, while the Gold plan allows free incoming calls for $3.99 per month. What seems to distinguish the Planet ZivVa approach is that it borrows the concept and reverses it, but does not assume that the user will have access to a computer, let alone a broadband connection (required for Stanaphone, optional for glophone).

Personally, while I am impressed with Planet ZivVa, I think I am unlikely to pay the $29.99 monthly fee once the service goes live, simply because I am unlikely to ever generate enough traffic to justify the expenditure, and will probably carry on using a combination of the PSTN and SkypeOut until my parents migrate to broadband. However, as Andy Abramson over at VoIP Watch rightly points out, this is the sort of product which could be really appealing to friends and relatives back in countries which are the source of immigrants, exchange students or migrant laborers into North America, who probably would stand to save a considerable amount of money from such a service. It also represents an economical way for small businesses in North America to have a presence on foreign soil, albeit a virtual one. Where it gets really interesting is when the number-play is not just one way, in other words, when I in London have a Memphis, TN phone number and my parents in Memphis have a London number, both on the same service (substitute Lima and Chicago, Hanoi and Boston, Tunis and Paris as appropriate).

Again, for those of us lucky enough to have access to broadband connections, softphones, and other whizz-bang technology, this may not be a hugely attractive service as it stands now, but we have to remember that broadband population penetration globally stood at only 1.9% in Q1, and the ITU's 2003 figures estimate that global teledensity is still only 18.8%. A lot of humanity spends time queueing up to make calls to, or receive calls from, relatives abroad, paying extortionate rates in the process. Services like this are yet another potential source of deflationary pressure for the European incumbents at the margin, though the implications for incumbents in emerging markets should be considerably greater. With this and all the other sources of pressure working in tandem, we ponder how long it may be before an incumbent in Europe decides that, rather than track the steady erosion of its traditional business, it's time to stand up and embrace something radical, such as a P2P telephony solution, and effectively write off its existing business in favor of a longer term survival strategy.