Peerio's roadmap - Peerio and QuesCom

GSM gateway provider QuesCom and Popular Telephony, developers of Peerio, have announced that the QuesCom 400 GSM media gateway will support Peerio. This will provide IP-to-PSTN and PSTN-to-IP capability, targeted at the enterprise market. Skype is reportedly close to unveiling its inbound calling service branded "SkypeIn," but this announcement seems to have beaten them to the punch, at least within the enterprise area, and as an embedded solution to boot.

Through the grapevine - glophone and Friendster

In January of this year we published a long report called EuroTelcorama No. 5: Fragmentation is the name of the game, which has gone on to line many birdcages and prop up many uneven table legs around the globe - as any good lengthy piece of brokers' research should (for more on this issue, see http://eurotelcoblog.blogspot.com/2004/07/special-excerpt-from-upcoming-daiwa.html). In EuroTelcorama, one of the observations we made was that the social networking phenomenon might offer a nice environment for alternative forms of communication to take place seamlessly, probably involving IM/VoIP.

Today we expect confirmation of just such a scenario, when Voiceglo and Friendster, which claims 9m registered users worldwide, announce a tie-up. Voiceglo's glophone browser softphone client will take pride of place on Friendster's portal, offering free peer-to-peer communication, and an upgrade path to premium, chargeable services (i.e., PSTN breakout) which will generate real revenue for Voiceglo.

Voiceglo has proven itself to be one of the most resourceful of broadband telephony players, using unorthodox deals such as this and the previously signed deal with eDonkey in its ongoing search for paying customers.

Resource update - H1 2004 unbundling stats available

ECTA has today released the latest update in its immensely helpful monitoring of unbundled lines. France leads the way in absolute numbers, as we already knew, but in terms of unbundled lines as a percentage of total DSL, the Netherlands and Finland share the lead at 23%, with France at 16%, and Sweden and Denmark in joint third at 14%. The UK number is not large enough to be measurable, which we also knew, but as with France, a lot can change in a year. France went from 65k to 731k in the space of a year, as a result of price cuts and innovative product offerings. We think a similar process is beginning to play out in the UK. ECTA's survey is available as an Excel download here (http://www.ectaportal.com/uploads/BroadbandScorecardQ22004.xls).

Ground level view - Skypin' on a jetplane

West Coast arch-VoIP blogger Andy Abramson is coming to Europe, and apparently is carrying more kit than the Iron Maiden road crew. He just Skyped me from his flight, which was still boarding at Newark, using a 1xRTT laptop card. I couldn't tell any difference in sound quality, though he apparently heard a bit of latency. Overall, however, it was better quality than cellular - and free. And thus we have another good illustration of the cannibalization risk for 3G on a longer term view. The European wireless carriers derive a disproportionate level of profitability (relative to international peers) from termination of others' traffic and international roaming, both of which are vulnerable in an IP world.

With data accounting for around 15% of cellular ARPU across Europe on average, the revenue replacement process is going to have to accelerate significantly over the long term in the face of this sort of arbitrage opportunity, and at a pretty punchy margin. Last week, Vivendi Universal said that Vodafone live! customers at its SFR subsidiary generate ARPU 10% higher than non-live! subs, and that overall data ARPU at SFR was up 39% YoY in the first half, to EUR46 per year annualized, or EUR3.80 per month. Assuming that much of this data usage is SMS (and also vulnerable to some substitution in an IP world), they're working from a pretty low base when it comes to "pure" data revenues, as are most operators. (I typically spend GBP2 - 4 per month on my GPRS account with Orange, and consider myself a relatively heavy user, but my GPRS usage has definitely cut into my SMS usage.) Voice minutes of use at SFR, in contrast, grew 5% YoY in the first half.

Realistically, this revenue replacement process is a marathon, not a sprint, with parasitic applications like Skype in their infancy versus the ubiquitous nature of cellular voice. However, with a lot of 3G networks in Europe just getting switched on, investor sensitivities to these issues should come on the radar pretty clearly over the next few months as anecdotal evidence like this begins to circulate. The difference this time is that, unlike the "I'm using Skype from my laptop in a coffee shop on a Wi-Fi connection" scenario we've been used to, the advent of 3G widens the net considerably in terms of opportunities for user substitution behaviors.

Daiwa EuroTelcoblog No. 80: Tuesday 28th September, 2004 - P2P telephony: it's all about networking

Popular Telephony, developers of the Peerio P2P telephony application we profiled back in late June in issue No. 52 (http://eurotelcoblog.blogspot.com/2004/06/daiwa-eurotelcoblog-no_25.html), are set to make two interesting announcements today. The first is a contract with French terminal manufacturer Logicom, to develop a Peerio DECT phone for the consumer market, as well as an IP/PSTN gateway. This deal, which was signed some months back but not officially announced until today, should see the first Peerio consumer phones hitting the market in Q1 2005.

The other announcement, more intriguing from a "big picture" strategic perspective, is the appointment of a new advisory board member: Kevin Power, chairman of ECTA, the European Competitive Telecommunications Association. Coming on the heels of Skype's appointment of a board member from Cisco (no direct investment or involvement from Cisco itself), this highlights the importance of networking of the human variety. Without wanting to read too much into this news, it is fair to point out that ECTA has a large and eclectic membership (http://www.ectaportal.com/html/index.php?pgd=members_list), and given Peerio's apparent orientation of effecting change from inside the industry via an embedded product strategy, we wonder how the "power of the network" will be affected by bringing Mr. Power onboard.

Hot off the wires - Livebox flying off the shelves

Reuters Markets Monitor has a story on this morning (French only) citing an interview with Paul-Francois Fournier, France Telecom's head of European Broadband, stating that demand for the IP triple play home gateway branded "Livebox" has been greater than expected. Apparently, FT is moving 2,000 units a day overall. In the French market, Free's "Freebox" product is undeniably cheaper at EUR29.99 (for 5Mbps DSL, TV and VoIP for fully unbundled users), while Reuters correctly calculates the cost of a Livebox triple play at EUR76 per month (EUR34 for 2Mbps DSL, EUR16 for TV, EUR13 for PSTN line rental, EUR10 for "unlimited" VoIP, and EUR3 for the box rental). We are skeptical that this sort of price point can gain significant traction in the French market, where the risks of cannibalization are multiple and the agenda is churn mitigation. More interesting is the impact that this offering, priced more aggressively as an unbundled product, might have in the UK (where the Reuters story claims FT is selling 1,000 per week just through the website), Netherlands and Spain.

An aside: It's started already...

Yesterday I met up with a former sell-side analyst now in the telco investor relations business. At one point, when we were discussing telco content distribution strategies he said, "Just wait, six months down the road, we're going to see the telcos start to buy up media assets." I agreed, but it looks like we may not have to wait nearly that long...

http://www.swisscom.com/GHQ/content/Media/Medienmitteilungen/2004/20040924_01_Cinetrade_Gruppe.htm

Resource update - Legal download margins

UK daily The Independent claims to have data showing that the labels keep 62 cents out of every 99 cent download, with basically no incremental investment. Hmmm. Maybe using the internet as a direct sales channel is not such a bad idea afterall...

http://enjoyment.independent.co.uk/music/news/story.jsp?story=564004

Daiwa EuroTelcoblog No. 79: Wednesday 22nd September, 2004 - The revolution will not be televised: takeaways from the P2P video event at Columbia U.

"You will not have to worry about a dove in your bedroom, a tiger in your
tank, or the giant in your toilet bowl.

The revolution will not go better with Coke.

The revolution will not fight the germs that may cause bad breath.

The revolution WILL put you in the driver's seat."

"The Revolution Will not be Televised" - Gil Scott-Heron


On 10th September I attended and presented in an event at Columbia University devoted to the issue of P2P video as a mass medium, sponsored by the Columbia Institute for Tele-Information of the Columbia Business School, the Marconi Foundation, the Columbia Engineering School, and the European Institute on the Media (though I was the only "European" presenting who was not affiliated with Columbia). The event was somewhat poorly attended (c.100 people) versus my initial expectations, but I believe this mainly reflects the fact that, even for the industry itself, the issue and its many ramifications are only really beginning to come on the radar screen. That's probably also generally true of the risk of large asteroid collisions with Earth, though the sudden appearance of one plummeting towards our planet would no doubt sharpen the minds of earthlings everywhere (in a New York minute). The future development of P2P may be the equivalent for the entertainment industry, and also to telcos who are trying to make the transition into content provision.

I saw in the audience representatives from two old-school US telcos, and there were also attendees and presenters from the media/entertainment world, though these were fewer in number than I might have expected. There was good representation from the legal arena, naturally, as well as from the engineering side of things. Those of us in attendance were treated to interesting perspectives on issues ranging from P2P economics to technology, community/society and law/policy. There was far more information available than I could possibly hope to correctly or fairly represent here in its entirety. Rather, I will attempt to distill some key messages from the panel presentations (including my own where appropriate) and the ensuing discussions.

Summary takeaways

1. Video P2P is widespread, growing, and is a phenomenon which content owners and traditional distribution platform owners will struggle to contain. The costs to various stakeholders are potentially large and fairly well-documented. What is less clear is whether there is a case for business models built on using P2P proactively. Some early examples exist, but the legal, technical and structural mechanisms which would give media companies a higher comfort level are not yet in place.
2. Attitudinal surveys of P2P users appear to show some potential for P2P to be employed by content owners as either a promotional or alternative distribution platform. The mass media portrayal of file sharing as a pure substitution behavior (or outright theft) is simplistic at best. Demographic data from Europe suggest that the educational and income levels of some P2P users may be quite favorable to employing P2P distribution models as a means of generating incremental sales for content owners.
3. The experience of the music world suggests that a considerable portion of the very valuable back catalogues of media companies may be available online in relatively unpolluted form, versus the high file pollution levels seen in versions of current popular hits. This suggests that for older, potentially more affluent, file sharers, the most desirable content is also the most widely available with the least inconvenience. Therefore, the potential upside and downside for the music industry players could be great, depending on how they respond. Translated to the TV and film world, the same risks and opportunities may be expected.
4. Some content owners may be open to a P2P distribution model, but in cases where they share corporate ownership with distributors, there are significant cultural and strategic conflicts to overcome.
5. The copyright and security aspects of P2P content distribution are the principal chokepoint in harnessing the opportunity, and appear unlikely to be resolved in any definitive way in the short term.
6. The rise of P2P may also have the potential to support new non-corporate sources of content and journalistic creation. In particular, the advent of more robust wireless devices (especially camera phones and handsets with high capacity storage), coupled with new wireless networking technologies, would seem to open up all manner of possibilities. Traditional content and advertising companies may find themselves in an uncomfortable position in this scenario.
7. Consumers have asserted their will to control their media consumption, increasingly on an a la carte basis, irrespective of time, place or other constraints. The opportunity in P2P for the content owners and distributors is to find a formula whereby they can deliver this and remain a part of the consumer's menu. Otherwise, consumers will continue doing it for themselves, largely beyond the reach of any control mechanisms. If media companies go direct to the consumer in an attempt to harness P2P's potential, then the content strategies of distribution companies (cable and telcos) may suffer significant damage.

Sizing the market

A number of presenters, including myself, attempted to give some sense of scale to the current P2P phenomenon. Adam Toll from P2P monitoring and measurement company Big Champagne said that the platforms monitored by the company worldwide measure just under 8m concurrent users at present. While feature-length films account for only around 1.8% of total files on the P2P platforms, Big Champagne observes that video overall accounted for 23% of total data shared on P2P in August, demonstrating the disproportionately data intensive nature of video content (file size for a feature length film may range from 600MB to well over 1GB). My own presentation contained data from both the OECD and P2P policy solutions developer CacheLogic, showing somewhat less than 10m concurrent users (CacheLogic found 8m on average and 10m at periods of peak usage). Europe claims seven of the top ten positions in file sharing intensity, and judging from the OECD data based on KaZaA users, video content (in terms of file numbers) accounts for a larger proportion of content in many European countries than anywhere else. In Germany, which had the highest proportion of video content in the OECD data, the proportion of video approached 40% of total files shared. Also of interest in the OECD data is the observed growth in non-Fast Track users, which seems to support the notion that the growth in users overall is coming from video content, or at least being driven by platforms which handle video content better, such as BitTorrent and eDonkey. The Pew Internet & American Life project reported in April that 15% of US internet users have downloaded video content, up from 13% in Q4 2003. In France, 19% of all internet users have downloaded feature films.

Kevin Werbach, from the Wharton School of Business, voiced his belief that P2P video is already a significantly larger phenomenon than is currently being reported in the mainstream media, and that video content may already be the single largest class of data being shared on P2P networks. He also stressed that the technical nature of "data swarming" platforms such as BitTorrent, where an object is downloaded in separate segments from a number of contributing nodes, meant that the more popular a piece of content, the more efficient the download process should be, further compounding issues of controlling or containing the contagion. His vision of the world in four to five years' time was one in which the availability of ever-cheaper storage (multi-terabyte drives in this example), camera phones and video-encoding devices would put 500m - 1bn people in a position to post independently created content to the web, potentially fundamentally altering the existing media landscape. (Our own observation is that there are already some well-established examples of just this sort of effect taking place. One is Text America, which already contains an extensive range of camera phone blogs, including a growing proportion of video (http://www.textamerica.com/moblogs.aspx?_media=M), and camera phone photography itself has been acknowledged this year as a "legitimate" medium worthy of public exhibition (http://www.sentonline.com/). At the other end of the spectrum, but no less interesting, are "new" episodes of Star Trek available on the web (http://www.newvoyages.com/downloads.html). This new, largely decentralized, source of content creation and distribution is something we may expect to see much more of, and the traditional media and distribution companies will be challenged to define business models around them.)

In terms of the size of costs to stakeholders from P2P, there are a variety of costs to be considered beyond monetary ones. However, to cover these first, the IFPI's annual piracy report for 2004 cites $4.5bn in illegal music sales in 2003, though it must be acknowledged that physical piracy (illegally produced CDs) almost certainly still dwarfs P2P revenue leakage (one in three discs sold in 2003 was pirated). In fact, it is extremely unclear as to the real extent of financial impact on the music industry from P2P, and the industry's own appeals against file sharing have stopped short of quantifying the precise effect. The IFPI recently found that 27% of those surveyed claimed to have reduced expenditure on CDs as a result of file sharing, though 15% responded that their legal music buying had actually increased. What the IFPI doesn't drill down into is whether the 15% who bought more are a more valuable market segment than the 27% who bought less. Nevertheless, the important fact is that even in this study advancing the interests of the music industry, it is apparent that file sharing has a significant promotional impact on legal product sales in some user segments - the P2P phenomenon is not a complete loss for the labels. Similarly, research jointly produced in March by the Harvard Business School and University of North Carolina (http://www.unc.edu/~cigar/papers/FileSharing_March2004.pdf) cited some cases where P2P user surveys seemed to indicate a net positive impact on music sales, and the researchers' own statistical observations of downloading behavior concluded that the impact on sales was "statistically indistinguishable from zero."

There have been reports of record labels actively engaging the P2P community in an attempt to gauge the direction of musical taste (http://www.mercurynews.com/mld/mercurynews/news/8318571.htm?1c), and this trend was recently further augmented by BBC Radio One's inclusion of a separate (legal) Download Chart in its programming, in acknowledgement of downloaded music as a distinct market governed by different dynamics. (In fact, a side-by-side comparison from the two charts from 19th September shows that only six out of the top 20 titles were common to both charts, and these songs occupied dramatically different slots in each, respectively. One distinguishing feature of the download chart is the presence of older material, as downloaders demonstrate that they do not necessarily wish to be limited to the "linear" contemporary playlists of Top 40 radio formats. One entry in the top 20 download chart was "Seven Nation Army" by The White Stripes, a song released more than one year ago. This kind of "time-shifting" behavior is obviously one way for content providers to extend the marketable life of their catalogues.) The Motion Picture Association of America, which has been a highly vocal critic of P2P (and of other innovations in distribution models historically), does not include revenues lost to file sharing in its $3bn estimate of piracy impacts, citing "difficulty in calculating internet piracy losses". More straightforward perhaps is the cost/potential cost of reputational damage/loss of systems integrity/lost productivity suggested by the statistic from policy/security firm Blue Coat that 39% of file sharers in the US claim to engage in file sharing from the workplace. In terms of more conventional costs to carriers, CacheLogic in the UK has estimated that P2P will inflict up to EUR100m in IP transit costs alone on European ISPs in 2004, not to mention the longer term capex costs necessitated by evermore bandwidth intensive applications traversing the networks. Litigation against ISPs and coerced broadband customer churn to stem P2P usage are other forms of cost I discussed in my presentation, and which have been previously documented here.

P2P user characteristics

What sort of people share files on P2P networks, and what are their motivations? My presentation contained some data from French regulator ART (via the OECD report), which shows that file sharers in France are just as likely to be high earners (monthly income of EUR3,100 or more) as low earners (EUR900 or below), and actually more likely to have a university degree. This is quite a different outcome to the findings in the US market, where the Pew Internet & American Life Project found last year that the young, students, those from lower earning backgrounds and ethnic elements of the market dominated file sharing activities (http://207.21.232.103/pdfs/PIP_Copyright_Memo.pdf). However, even in these segments of the market, the motivators for P2P file sharing may be very complex.

Dr. Gali Einav of Columbia delivered results of her study into the motivations and attitudes of university students in video file sharing. Her research, involving interviews with university students, reveals some surprising things. Some respondents identified the need for social conformity as one aspect. The Government Accounting Office estimates that 90% of undergraduates in the US engage in file sharing, and Dr. Einav identified a certain level of anxiety at being perceived as an "outcast" if one did not engage in file sharing. In other words, we are talking about a social activity, or pastime, as much as anything. She also discovered a wide range of intensity of downloading activity, from once a week up to 300 movies in a single semester. In terms of the hierarchy of motivations for video P2P activity, the dominant factor is not cost, but convenience. Well over half of respondents cited convenience and immediacy as the key drivers. Of secondary, but significant, importance, were the ability to introduce friends to new content (the social aspect again) and the ability to sample new content before committing to a purchase. Cost savings appears quite insignficant relative to other factors.

Interestingly, in the specific area of movies (as opposed to sharing of TV programs), Dr. Einav found that most download activity relates to quality control issues - wanting to sample a film before either buying it or seeing it in the cinema. Students responded that P2P file sharing of movies did not diminish either their attendance at movie theaters or their purchasing of DVDs, though they acknowledged less spending on DVD rentals. As an extension of this line of enquiry, Dr. Einav asked about theoretical pricing thresholds for content to be legally purchased on the web via download. Respondents identified a price range in line with DVD rentals for movies ($3 - 5), and 99 cents to $5 for TV episodes or blocks of episodes (depending on the series). Intriguingly, the students responded that they would be willing to pay more for cancelled TV shows or rare content. In terms of general attitudes towards file sharing, students expressed no qualms about copyright or revenue loss for the entertainment industry, but also indicated an admiration for the iTunes model (because it is both legal and affordable). Conversely, they expressed ambivalence towards university-led attempts to procure content on their behalf, which is consistent with previous anecdotal evidence (http://news.com.com/2100-1027_3-5103918.html?tag=st_lh). Overall, students believe that downloading of video content will eventually be a net positive for the entertainment industry as a promotional tool.

Let’s pause here for a moment to synthesize a couple of points. What Dr. Einav’s research seems to point out is that student P2P users, often demonized as flagrant, unthinking violators of copyright, would conversely appear to be willing consumers of paid download services if the pricing, terms and user experience are right. At the other end of the age/economic spectrum, wealthy, educated French P2P users seem to offer up another piece of evidence that there may be a lucrative market out there for a properly targeted P2P video content offering. Most interestingly, both groups appear, on the surface, to be good target audiences for offerings involving niche content from the back catalogues of TV and film studios. From a long-term perspective, this may arguably be an asset more valuable to media companies than the ephemeral content found in daily TV schedules, or indeed in music catalogues. On the other hand, one man's ephemera is another man's gold, and companies such as Rhino Records have built a successful business case out of just this market segment (http://www.rhino.com/store/CatalogList.lasso?VideoStyle=TV).


You can’t always get what you want

If we assume that there is a significant potential audience out there, which is comfortable with P2P technology, amenable to buying rare or niche content, and with the wallet to do so, then we should consider the experience of the P2P user in seeking to find suitable content. Relevant to this issue was a study by researchers at Polytechnic University on the issue of “Pollution in P2P File Sharing Systems” (http://cis.poly.edu/~ross/papers/pollution.pdf). In this interesting work, presented at Columbia by Dr. Keith Ross, the researchers created a system for monitoring the entirety of the Fast Track ecosystem (estimated at 4m users, or roughly half the observable concurrent P2P user universe at any given time), and investigated levels of pollution, or corruption, of available content. This is a particularly relevant issue, in light of the recording industry’s history of employing professional P2P polluters such as Overpeer (acquired by Loudeye in the spring) to infuse P2P networks with faulty content in an attempt to frustrate illegal file sharers. This may take the form of versions which are either incomplete, or which stutter and skip, or which may be completely erroneous (for example, a track labeled as Eminem/D12’s "My Band," which is actually Tammy Wynette’s “Stand By Your Man,” or "Banjo Boy," by Jan and Kjeld).

The ethos underlying the pollution strategy is “if you can’t beat ‘em, frustrate ‘em,” and the Polytechnic research would seem to support its efficacy. Researchers found that, for popular current hits, KaZaA (and other Fast Track-based platforms) might contain as many as 50,000 uniquely identifiable copied versions of songs, and in some cases more than one million copies of these various versions available. However, despite (or more appropriately, because of) the popularity of these songs, pollution levels of as much as 75% were observed, which strongly suggests that record labels are focused on defending the more ephemeral segments of their artist portfolios. However, the researchers also looked at contamination levels in five “classic hit” tracks (Springsteen’s “Born to Run,” the Beatles’ “Hey Jude,” Madonna’s “Like a Virgin,” Chicago’s “Saturday in the Park,” and Carly Simon’s “You’re So Vain”), and found pollution levels of below 20%. In the case of “Hey Jude,” pollution levels approached zero, which is remarkable considering that the Beatles catalogue has so far avoided any licensing to legal download services. In other words, it would appear that large and valuable swathes of the music catalogue (and by extension, probably the film and TV catalogues) for niche (non-contemporary) content is available for download on P2P networks illegally with a greater assurance of quality and ease of use for the consumer.

This is bound to be hugely galling to the media groups, as it suggests that there may be some inherent value in trying to employ P2P platforms as distribution and promotion arms, yet they understandably have concerns over security, monitoring and copyright issues. This was confirmed by a sales and marketing VP from Turner Broadcasting, who stated clearly that, as a content company, Turner was open to any and all forms of distribution for video content, so long as the audience could be accurately measured for the purposes of advertising sales. One potential drawback in developing this level of comfort in the US market would be the central role played by Nielsen in monitoring viewing patterns, and finding an approach appropriate to the P2P world, but with equal gravitas among advertisers, would prove difficult. (The BBC, which doesn't have to worry about advertising revenues, has publicly embraced BitTorrent as a distribution platform for some programming (http://www.computeractive.co.uk/news/1157302), and we think this may be extended to its entire archive in time via its interactive Media Player initiative.) Another relevant issue, which the Turner VP prudently sidestepped in his comments, was the inherent conflict between this strategy in the Turner division of Time Warner Inc., and the distribution strategies of sister divisions Time Warner Cable and AOL. For companies with huge vested interests in both content ownership and distribution (Time Warner most prominently, but also Vivendi Universal, Liberty Media and News Corp), or content ownership and consumer electronics (Sony), there is going to be an interesting balancing act developing around this issue, and we may expect a fair number of shouting matches and fisticuffs in conglomerate boardrooms around the world as P2P grows.

Keeping control and getting paid

Two issues where the anxieties of the media conglomerates may not see any relief anytime soon are security and copyright protection. A number of interesting presentations addressed both of these, though sadly with no clearer path to resolution emerging. On the security issue, Bobby Bhattacharjee of the University of Maryland proposed a trust inference system for imposing some order in the P2P world, and thus improving network performance (http://www.cs.umd.edu/projects/nice/papers/p2pecon04.pdf). The central issue here is that P2P is by nature decentralized, with no recognized trusted authority to validate users, as is the case in the "mainstream" internet world, administered by well-known DNS root servers and certificate authorities. P2P applications lack any prior trust relationships, user identities may be nebulous, and all users are inherently "insiders." This last issue is really key, as the security industry has built itself on the premise that malicious attacks inevitably come from outside the system. Various remedies spring to mind, based on reputational systems and user behavioral profiling to establish trustworthiness. The conclusion arrived at was that, rather than a punitive system, the most effective system for dealing with security issues may actually be to incentivize positive behavior. Protocols such as Overnet already have this principle built in, at least in terms of bandwidth. Overnet users who have faster connections for uploading, and who are willing sharers, can expect to receive faster downloads. This is presumably a mechanism for frustrating "free-riders," or P2P nodes which simply suck information out of the system, but do not reciprocate on the upstream link, which causes network inefficiencies. (One commercial variation on this incentivization idea appeared in my presentation - the distribution agreement between Morpheus and Heart, which was structured in such a way that file sharers could actually be incentivized to stay within the rules of the system by a promise of monetary compensation, effectively a sales commission. The day after this blog was published, 23rd September, eBay announced a music download partnership with a heretofore unknown company called PassAlong, which also employs this principle - albeit through a point system rather than cash.) One other interesting presentation, from Dan Rubenstein of Columbia, dealt with the concept of employing a P2P network scenario (based on Gnutella) to deal with network congestion arising from "flash crowds" on the web (http://citeseer.ist.psu.edu/cache/papers/cs/31773/http:zSzzSzwww1.cs.columbia.eduzSz~danrzSzpublishzSz2004zSzStavrou2004:PROOFS.pdf/a-lightweight-robust-p.pdf), as occurred to the websites of popular news organizations during the 9/11 attacks. The Q&A session following this technology panel included the proposal that P2P could actually be the ideal untapped technology for distributed storage of vast quantities of information, utilizing the huge, largely under-utilized collective storage capacity of web-enabled PCs around the world. This idea was also touched on to some extent as a business development idea by Greg Bildson, the COO of Limewire, in a later presentation. Overall, however, the issue of security, in the sense of digital rights management aspects, received very little enthusiasm from some of the more experienced members of the panels, and indeed, we have already seen cases where DRM protocols supporting successful commercial content distribution have been quickly cracked (http://www.theregister.co.uk/2004/01/05/itunes_drm_cracked_wide_open/ and http://www.theregister.co.uk/2004/04/06/playfair_drm_circumvention/), reverse-engineered (http://www.realnetworks.com/company/press/releases/2004/harmony.html), or otherwise sidestepped (www.ipodder.org).

We now come to the Mother of All Stumbling Blocks to the uptake of P2P as a legitimate distribution platform, which is copyright protection and enforcement, and there were a number of interesting ideas and heated exchanges around this topic. Alain Bourdeau de Fontenay of Columbia was forthright in stating that copyright has zero value, because it is ultimately unenforceable in this environment. This understandably sent the blood pressure of many of the economists and lawyers in the audience into the danger zone. There were, however, other points of view presented, among them a proposal from UCLA Law School professor Neil Netanel, to adopt a compulsory non-commercial use levy (NUL) of around 4.1% on goods and services related to the P2P value chain (http://jolt.law.harvard.edu/articles/pdf/v17/17HarvJLTech001.pdf). In plain English, Dr. Netanel has worked through the complex inputs in the P2P economy and come up with a 4.1% tax to be added to services such as broadband internet connections, and hardware such as PCs, Wi-Fi networking equipment, etc., which would be fed into a fund established to compensate copyright holders for revenues lost to P2P. Non-commercial "Illegal" file sharing itself would pass into legitimacy, because rights holders' earnings from the NUL fund would ideally offset revenue loss. Advertisers and content providers might seek to reclaim lost advertising "eyeballs" through product placement, which is already an issue thrown up by PVRs, and one which seems to have gained critical mass in the wake of Oprah Winfrey's recent car giveaway, wherein the sponsor's product effectively becomes the program (http://money.cnn.com/2004/09/14/news/newsmakers/oprah_gm.reut/). The compulsory licensing concept comes in contrast to proposals such as that tabled earlier this year by the Electronic Frontier Foundation, which published a white paper (http://www.eff.org/share/collective_lic_wp.pdf) proposing a voluntary collective licensing regime, wherein P2P users could "opt-in" to a voluntary levy system. Under this system, P2P users formally declare their participation in file sharing activities and agree to pay a monthly fee (the EFF mentions $5) for the right to continue unlimited file sharing activities.

Dr. Michael Einhorn, economist with the US Department of Justice and contributor at the excellent DigitalMusicNews (http://www.digitalmusicnews.com/), voiced a couple of very sensible objections to the compulsory licensing concept. Firstly, if the activity is not pervasive or near-universal, why should society at large subsidize the media conglomerates, or conversely, heavy P2P users, through a general levy on services and products involved in the P2P value chain? Indeed, though the record labels and film studios have spent a lot of time creating the perception that file sharing is a pervasive influence in society, in fact, even in heavy P2P markets such as Germany and France only around 1% of the total population is engaged in file sharing. What motivation would a 50 year-old woman in Leipzig, who uses her broadband connection primarily for email, shopping, banking, and listening to internet radio, have for contributing to such a fund? The second objection raised involves the issue of valuation of various content types. What differentiates P2P from other media forms is its eclectic nature. If we think of licensing regimes for radio stations, we are clearly talking about music, and music only. Similarly, if we think about licensing for cable networks, we are clearly talking about video content. However, P2P networks are employed to move content spanning areas as diverse as music, TV, film, software applications, books, static images/photography, and games. Even if a structure could be established to monitor and measure the market, and manage the payment of compensation on a proportionate basis to various market participants, we would soon find ourselves confronted with the issue of valuation of content. For example, how can we value a text file versus a musical work, or a game versus a film? Finding a formula mutually acceptable to all stakeholders would be exceptionally difficult, and accounting for and enforcing it would be almost inconceivable.

As an American ex-pat in Europe for more than nine years, it was interesting to observe the America-centric nature of this debate. Whether it be a compulsory non-commercial use levy, or a voluntary collective licensing fee, the proposals seem to largely ignore the global nature of media distribution and consumption. While such systems might have a slim chance of success if properly resourced and enforced on a national basis, the structures become, in our view, untenable on a global scale. The EFF's proposal, drafted by bright people with interesting views, has a surprisingly succinct and naive view on this issue: "As for file sharers in other countries, there is every reason to believe that if a collective licensing approach is successful in the US, it will receive a warm welcome and enthusiastic imitation abroad." However, the fact is that content licensing and royalty collection remain largely national-level functions, and thus fragmented not only by industry and geographical definitions, but also by national characteristics. Would the same book carry equal value in a highly literate society, such as Japan, as in Brazil, where literacy rates are significantly lower? What sort of PPP adjustments need to be made? How do we account for national taste? David Hasselhoff is known to be very popular in Germany, Jerry Lewis in France and Norman Wisdom in Albania, but is there a workable mechanism whereby the citizens of these countries are taxed proportionately to compensate the holders of rights for works featuring them? We quickly find ourselves having to establish some very complex formulas for compensation which would be unworkable and unsatisfactory. Lastly, we have to concede that not all countries are created equal in terms of their infrastructure for enforcement. This can be seen clearly in the IFPI's 2004 piracy report, where physical piracy (CDs, tapes) is found to account for less than 10% of units sold in countries like the US, Germany, France and the UK, but over 50% in countries like Brazil, China, Indonesia and Russia, where the IFPI concedes the authorities have bigger fish to fry on the law and order front. This situation probably bodes poorly for efforts to curtail electronic piracy as broadband penetration in these countries grows dramatically.

Conclusions

This is obviously a huge and exceedingly complicated issue for both the content and distribution companies, and I have not addressed some of the related areas of conflict (such as the software and hardware available to capture streaming audio, which were discussed in the Global Telecom Monthly for August). There are also other developments in the device pipeline which may complicate things further. For example, Samsung fired the first shot in the "iPod-ization of handsets" war just two weeks back (by announcing a handset with a 1.5GB mini-harddrive). Elsewhere, we have documented applications like Pocketster (and their likely equivalents using Bluetooth) which allow direct sharing of content between wireless devices, with no audit trail. The rise of municipal and commercial Wi-Fi networks increase opportunities for such behaviors exponentially, moreso with the advent of mesh networking technologies.

Dealing with the proliferation of P2P will necessitate that content owners bite the bullet and begin drafting strategies for exploiting the possibilities of P2P as a distribution and promotion vehicle, though this will inevitably entail compromises on pricing models, and may have implications on advertising revenues and issues of control. We have seen examples where independent software vendors have offered discounts to purchasers downloading the application via P2P networks, presumably because of the cost savings this approach offers on the marketing and packaging side. Similarly, we have seen Voiceglo adopt eDonkey as a distribution channel for its glophone VoIP client software, and again, the deal struck between Heart and Morpheus on the surface provides us with a good example of how P2P users may be incentivized to play the game. Moreover, we think there is a growing body of evidence to suggest that the P2P user base may contain a significant market segment which is interested in purchasing content via this platform if it is convenient, affordable, and flexible, with rare content proving a powerful potential draw to such potential consumers.

Nevertheless, these will not be easy strategies for content owners to formulate, particularly in cases where the corporate structure includes sizeable vested interests in both content and distribution. These internal conflicts would seem to be most likely in Time Warner, Vivendi Universal, News Corp., and Liberty Media. Similarly, Sony, which recently expanded its film library through the acquisition of MGM, is in a sensitive position, from our view, but by virtue of its hardware interests rather than distribution. Whether we can expect players not hindered by such cannibalization risks (EMI for example) to be more proactive is difficult to read.

For the pure distribution companies, such as cable and the telcos (who are really just getting into the game), we see a risk that, if the content owners eventually feel comfortable enough to get into the game directly, as has Major League Baseball in the US (http://mlb.mlb.com/NASApp/mlb/mlb/video/mlb_tv.jsp), part of their content business case potentially goes out the window. More fundamentally, as developments ranging from PVRs to the mounting pressure for a mandatory a la carte cable policy in the US seem to illustrate, consumers increasingly want to define and control their own media experience and consumption. If the content and distribution companies don't put in place the systems to deliver this, and in doing so, remain a part of the equation, we believe consumers will continue to do it themselves. Most of the identifiable parties in this ecosystem come out as losers under that scenario. Some degree of compromise is essential, and individuals, let alone corporations, generally don't favor change which involves a lower standard of living.

Lastly, as suggested by a number of speakers at the Columbia event, the decentralization of distribution, coupled with evermore powerful tools for creating, manipulating and storing content, may lead to some interesting surprises in terms of new media forms and media sensations. This is the motivation behind P2P systems such as Torrentocracy, which we have previously profiled - to create an alternative platform for the distribution of independently created content. Mainstream media companies may struggle to deal with the emergence of such new forms, and advertisers similarly may find it difficult to wedge themselves into such an environment. We should not dismiss this as a real possibility. Going back to pre-digital days, the band Metallica (ironically one of the most vociferous opponents to file sharing in the music business) intially rose to international prominence in the mid-80's essentially through viral marketing. With no radio airplay or attention from the mainstream music press, the band continued to sell out very large venues on the basis of word-of-mouth, until the mainstream eventually had to take notice. (It later occurred to me that some of the quasi-reality formats which have gotten so much attention in the television world over the past couple of years, like "Jackass" or the UK's "Trigger Happy TV," are, technically speaking, probably not that far from what "guerillas" could do themselves.) Wi-Fi technology similarly became established as a function of purchase decisions by individuals, long before carriers or municipal governments decided there was value in it. P2P is yet another bottom-up revolution, possibly the biggest in history, with very broad implications and unforeseen outcomes for every industry which touches it.

From "EuroTelco morning spam" - Wednesday 22nd September, 2004

More consolidation news

Tele2 has this morning issued a bid for Scandinavian broadband provider Song Networks, at a price of SEK75 per share, or 7% higher than what TDC offered just last week. Tele2 claims to have identified SEK300m in annual cost synergies achievable by year-end 2006. Song Networks' assets would give Tele2 access to 1.3m households (150 PoPs) in Sweden and a sizeable DSL network in Denmark (91 PoPs), Finland (179 PoPs) and Norway (112 PoPs). Also, it will put Tele2 within reach of around 75% of all companies with more than 10 employees in the Nordic region, and elevate Tele2 to the number two position in the IP-VPN market, after TeliaSonera. This is a pretty significant upshift in Tele2's competitive position in the Nordic region, and probably most affects TeliaSonera, at least initially.

French DTT

Buried in an obscure corner of today's Financial Times (page 4, News Digest, for readers of the UK edition) is an item reporting that the French Culture Minister is to attend meetings with UK super-mega regulator OFCOM today in London to discuss the UK experience in promoting digital TV penetration. France targets a penetration rate of 85% by 2007, according to the article, and one wouldn't need to be a fly on the wall in the meeting to guess that the role played by Freeview in the UK's success story will be an area of intense interest for the French, particularly given their pioneering work with Minitel. As we recently highlighted, Freeview continues to drive growth in digital TV penetration in the UK market, to the detriment of other platforms, most notably Sky. Application of a similar model in France would seem to pose some longer term threats to established and new pay TV initiatives in the market. At the sharp end of competitive pressure arising from such a move: Vivendi Universal, owners of satellite platform CanalPlus, as well as Cegetel, which is active in the TV-over-DSL arena; France Telecom; UnitedGlobalCom and the newco combining the cable assets of Vivendi and France Telecom; and DSL unbundlers including Iliad, Neuf and Tiscali.

From "EuroTelco morning spam" - Tuesday 21st September, 2004

When we downgraded BT Group to UNDERPERFORM back at the end of July, one of the main areas of concern we cited was a scenario in which the UK retail DSL market comes to resemble France, where unbundling has steadily gained momentum over the course of the past year and where we may well end 2004 with perhaps 22 - 23% of DSL lines unbundled. Last week we heard plans from Cable & Wireless in this area and today we get details of NTL's plans to unbundle 300 exchanges in an attempt to expand its footprint outside areas currently served by its cable network. This is a fairly extensive rollout, and the company has committed a similar level of capex (GBP55 - 65m) to what Cable & Wireless announced last week. This move is entirely expected, and was first inferred from oblique comments by NTL's CEO as early as the fourth quarter of last year. I would expect Telewest to move in the same direction on a selective basis, so as not to go head-to-head with NTL, its likely eventual merger partner.

The interesting aspect of this is that if NTL goes for full unbundling, it will be in a good position to migrate its existing TV offering onto the DSL platform, allowing it to offer a triple play over DSL, similar to what is being targeted by Wanadoo, Tiscali, HomeChoice and others. With Carphone Warehouse and others joining in the unbundling wave, this is clearly bad news. There are also some other wild cards - Energis is a key question mark. Another huge uncertainty, which no one seems to be talking about in this process (yet) is AOL, which is a major player in UK broadband and is reported to be working on a VoIP product. BT's alliance with Yahoo may perhaps heighten BT's importance as a strategic target for AOL in the unbundling arena, which would exert yet more pressure.

From "EuroTelco morning spam" - Monday 20th September, 2004

Press reports at the weekend and again in this morning's Financial Times highlight an impending foray into video for BT Group, reportedly from mid-2005. BT will reportedly launch a PVR in association with Freeview (the free digital terrestrial service which we highlighted last Friday). Apparently this will pipe the Freeview progam platform (26 TV channels, 23 radio channels) to BT DSL subscribers, with the added advantage of allowing video-on-demand services as a differentiator.

It will be interesting to watch the reaction of BSkyB, with whom the FT reports BT is in early-stage discussions over a content/distribution partnership. Our reading of the BT TV-over-DSL plans is that they constitute a frontal assault on Sky's core business, seeking to tap into the fastest growing TV platform in the UK - Freeview. Sky may be just as likely to formulate a direct response to the BT move rather than negotiate a partnership, in our view. Sky Digital set-top boxes are already linked to the PSTN to allow interactive services, and we have been contemplating for some time the potential for Sky to exploit this installed line base better, perhaps through a push into broadband itself - which leads to the inevitable question about voice.

More fundamentally, as concerns the likely benefits to BT, we cited in our Global Telecom Monthly back in February that, of all the European pay TVmarkets, the UK is in our view the least appealing from the standpoint of anew entrant. The cable players have been very successful at pushing digital penetration compared to European peers, multiple service penetration is high, Sky is the largest and most influential satellite player of any in Europe, and Freeview (which grew subscribers 13% sequentially in Q2) is a wildcard of the sort not found elsewhere in Europe. BT's strategy may serve as a churn mitigation device at the margin, but we would be surprised if the service made any material contribution to earnings or cash flow in the foreseeable future.

Resource update - the next frontier of presence?

With all of this M&A activity surrounding presence-based functionality, it's interesting to contemplate what the next step is. There's some interesting work going on at Carnegie-Mellon and MIT on the issue of context-aware mobile phones, which can be viewed here http://www.neemanet.com/projects_sensay.html (includes interesting graphics, academic paper and demonstration video) and here http://www.media.mit.edu/wearables/mithril/photos.html. The current designs are cumbersome, but the concept in application would enrich the whole presence proposition tremendously, whether fixed or wireless.

Daiwa EuroTelcoblog No. 78: Friday 17th September, 2004 - One piece at a time

This week has seen some interesting M&A developments in and around the IP voice space, suggesting that we're about to see a cascade of small acquisitions of players possessing key ingredients in assembling the killer IP communications platform:

• First, on Monday we saw Cisco acquire Dynamicsoft, a specialist in presence applications in the wireless environment (and the secret sauce in Sprint's push-to-talk solution), for $55m in cash.
• Yesterday brought the news from TheStreet.com that Skype has added a senior Cisco executive to its board, a development which some have interpreted as being related to the firewall traversal capability which is such an impressive differentiator for Skype. Cisco has clarified that the company itself has no involvement or investment, however.
• This morning Bloomberg reported that the CEO of Tandberg, which acquired Ridgeway Systems of the UK in June for $16m cash, is on the search for up to four additional bolt-on acquisitions of a similar size. Ridgeway was brought in for its expertise in firewall traversal for SIP applications, which Tandberg will integrate in their desktop conferencing platform, but today's Bloomberg article identifies Tandberg's new interests as lying in the advanced wireless networking and streaming technology arenas.
• Also this morning, Alcatel announced the acquisition of eDial, also a specialist in SIP-based presence, conferencing and collaboration, for $27m in cash and shares.

This activity highlights two messages we've been sharing with frustrated investors for some time: 1) VoIP is going to be a pervasive part of all sorts of services and devices that we don't immediately associate with "telephony" as such (one reader recently wrote in to propose that ultimately VoIP will not be a service at all, but rather a product); and 2) a lot of the most interesting innovation has been in the hands of small, mainly unlisted companies, in possession of a strategic solution which is cheaper to buy than to build. Our Norwegian friends Paradial, who have a very impressive SIP firewall traversal solution, recently launched a public SIP service (http://www.paradial.com/documents/0_9_8_press.pdf), and are one good example of the sort of European company whose phone may be ringing. eStara (http://www.estara.com/) is another impressive company with a lot of high-caliber customers, which might have a heightened appeal in this climate. It is also interesting to see the listed US company (market cap $92m) Xten Networks up 13% in the past week (outperforming NASDAQ by 6%).

Indeed there are so many "IP enablers" out there with something unique to offer, we think the M&A gurus, VCs and lawyers are going to be increasingly busy as the mainstream wakes up to what is happening and tries to stake a claim in it.

Resource update - Wi-Fi hotspot map

Multimap has a new detailed Wi-Fi hotspot map available. This link shows an example, based on the area around my office (http://www.totalhotspots.com/results.php?action=show&hsid=11216), but the database claims to cover 61 countries.

Daiwa EuroTelcoblog No. 77: Friday 17th September, 2004 - I want my free TV, or UK digital TV update for Q2

We knew that BSkyB's calendar Q2 subscriber growth numbers were unimpressive, but today the more accurate picture emerges from the OFCOM digital TV market update for Q2. The growth in total free-to-view households was 13.7% sequentially in Q2, vs. 1.1% for Sky. There are now an estimated 4.4m Freeview receivers installed in UK homes (+12.6% over Q1 levels), and there has been a strong 32% sequential uptick in free-to-view digital satellite viewers (now 305,000 strong, some of whom are former Sky subs who receive only free channels). OFCOM also reports TV-over-DSL subs, which now number just over 9,000, up 4.7% in the quarter. Excluding analogue cable, which is in terminal ex-growth in the UK, Sky is the slowest-growing platform for pay TV in the market by a wide margin (even cable managed 2.5% sequential growth in digital subs).

The statistics highlight the growing fragmentation in the broadcasting market, which itself echoes some familiar developments in telecom - turgid growth on traditional platforms, relentless consumer search for value, and an apparent preference for free services as against platforms which can offer advanced video-on-demand and PVR functionality. The latter is bound to be a very vexing development for players attempting to make such services a differentiator in their product offerings. Earlier this year, OFCOM research found that PVR household penetration is only around 2% at present in the UK, though digital TV penetration overall grew by 2.4 percentage points in Q1, to 55.4%, and by far the most significant growth is coming from platforms where on-demand and PVR functionality are not really an issue.

Judging from statements by Sky CEO James Murdoch at the latest set of results, we can expect Sky to throw some interesting features and services at the market over the coming months (potentially including, he suggested, something along the conceptual lines of the mooted TiVo/Netflix service which has gotten so much media attention), and no doubt the DSL brigade are coming in strength to the TV market. We also wonder what sort of service enhancements PCCW's UK wireless ISP Netvigator might have up its sleeves, given its parent's background in content. These are very exciting times in terms of service development, but we who watch the sector must be careful not to be swept away by a wave of technoeuphoria. The data published today seem to clearly show that the two key drivers of UK digital TV growth so far are simplicity and freedom of access.

http://www.ofcom.org.uk/research/industry_market_research/m_i_index/dtvu/dtu_2004_q2/dtvuq2_2004.pdf

From "EuroTelco morning spam" - Friday 17th September, 2004

One incremental piece of bad news for BT Group yesterday, as Cable & Wireless outlined its unbundling strategy for the UK market. Since its acquisition of unbundling pioneer Bulldog Communications earlier this year, we have been questioning what the implications were for the residential broadband market, as C&W has previously maintained a focus on business markets since the disposal of CWC consumer division to NTL in 1999.

It is clear that C&W is now targeting at least a segment of the residential market in the UK with this initiative. Figures contained in C&W's presentation from yesterday reveal 1.2m teleworker homes in the UK presently, rising to 1.4m by 2008, which implies that even if the focus remains on business, there is an extension of this strategy which involves a significant portion of the residential market. Additionally, this segment is, in our view, likely to be a good candidate for the more bandwidth-intensive services offered by Bulldog, and more of the value-added support and application services which BT is targeting in elements of its broadband initiative. C&W aims to have 400 exchanges unbundled by end 2005, which it projects will give it access to 30% of business and residential premises in the UK, spending GBP40 - 50m in this financial year and earmarking an additional GBP15 - 35m in 2006, subject to uptake.

As we have speculated previously, the next domino may be the resurgent Energis, another company which has traditionally had a business focus, but may well now re-emerge as a quasi-consumer brand.

Daiwa EuroTelcoblog No. 76: Thursday 16th September, 2004 - Sweet dreams, my PABX

Some time back we profiled Peerio, the P2P application from Popular Telephony which aims to disintermediate the PABX vendors (and many other market participants) through the power of software. One company which shares some characteristics (and some important differences) is little-known Canadian firm Nimcat Networks (www.nimcatnetworks.com), which has thus far been avoiding coverage ahead of an imminent marketing push. In common with Peerio, Nimcat has a P2P application interoperable with SIP and H.323, developed from the ground up, with 12 patents filed to date (and more in process) covering North America and the European Union. Also similar to the Peerio approach is a focus on embedded solutions, in which the aim is to license the application to chip and keyset manufacturers, who then ensure the penetration of the application through their normal sales and partner channels.

At this point, however, the two strategies diverge. While Peerio has so far racked up contracts spanning everything from consumer phones through to enterprise IP phones and on to CRM applications, Nimcat is focused on the opportunity within the SME segment. At an estimated deployment cost ranging from $600 - 1500 per seat (depending on features), either purchasing or overhauling a PABX is prohibitively expensive for the average SME. It is just this sort of choke point in the market which Nimcat is hoping to unlock, with a bundled solution that in many cases can deliver cost savings of up to 66% relative to conventional centralized systems.

In practice, the Nimcat solution embeds the intelligence traditionally associated with PABX or Centrex technologies into a standard client device, and scales to multiple thousands of lines within a single location if necessary. However, management say their experience suggests that organizations of more than 150 persons typically will want to retain some sort of centralized control structure, which implies that the sweet spot of this segment may be in implementations of 150 lines or less. Administrators retain control through a system of dialing rules and optional features unique to each user, and this also has the added value of allowing the service provider to shape revenues. The one-hour conference call we had with senior VP for Business Development and Marketing Marc Gingras revealed the audio quality to be exceptionally good, on a par with the PSTN, and with no perceptible latency or flutter.

Of interest from a strategic perspective is the fact that among Nimcat investors we find names like Siemens and Broadcom, and we note that Nimcat has successfully ported its software onto the chips of all major silicon vendors. As a result, Nimcat claims a time-to-market for device makers of between two and six months. We expect that Q4 of this year or Q1 of 2005 will see some significant announcements regarding products and partnerships in the more traditional enterprise space, and beyond that we expect the company may be working on a variation for the wireless arena. Considering the kind of cellular roaming charges the average SME is likely to incur, we expect this is yet another attractive area of cost savings which customers in this segment might be looking to realize.

Market definition in Europe is somewhat tough, but the European Union's Observatory of European SMEs for 2003 (http://europa.eu.int/comm/enterprise/enterprise_policy/analysis/doc/smes_observatory_2003_report8_en.pdf) found that the market consists of 18.7m enterprises in the EU15, and SMEs in the EU actually account for a greater proportion of employment than is the case in the US (69.7% versus 49.1%). While SMEs in the survey rated adoption of new technology as a relatively unimportant inhibitor to their business development, and generally agreed that telecoms deregulation has benefitted business overall, they also acknowledged that their lack of bargaining power in procuring services put them at a disadvatange relative to large enterprises. Gross margin in SMEs also tends to correlate well with enterprise size (i.e., it is lower in smaller organizations), and the EU found that SMEs overwhelmingly favor reduction in non-labor costs as a response to weak economic conditions, as opposed to other courses of action. This may contribute to the apparent high level of interest in VoIP found in a study by the British Chamber of Commerce last year. The BCC found that 42% of enterprises with 250 or more full-time employees on site already use VoIP, and a further 23% planned to take it up at some point. Below this level, however, interest in VoIP was similarly strong, with 17% of enterprises of 50 - 249 headcount intending to adopt it, and 13% in the 20 - 49 employee range (http://www.chamberonline.co.uk/policy/pdf/broadband_survey_2003.pdf).

Nimcat claims that its product strategy has no particular regional bias, however, from our own perspective here in Europe, the case for margin enhancement for the SMEs through the kind of savings it may offer may be of relatively greater importance than in North America.

Resource update - Nokia paper on Mobile P2P

The always-excellent Digital Music News (www.digitalmusicnews.com) today refers to a Nokia whitepaper on this issue, which figured in last month's Global Telecom Monthly and formed part of my presentation at the Columbia P2P video event last week (a review of which is forthcoming). With operators and handset vendors rushing to embrace Wi-Fi as another feature set on the handset, with mesh topologies an evermore promising proposition (cf. http://www.meshnetworks.com/index.htm), and with Samsung leading the charge on mobile storage (http://www.samsung.com/PressCenter/PressRelease/PressRelease.asp?seq=20040907_0000069353&type=TelecommunicationNews), it looks evermore likely that Nokia's conclusion is entirely on the ball: "Sharing content between mobile phones using Gnutella or similar protocols may be within reach."

The paper is available at:

http://www.nokia.com/library/files/docs/Peer_to_Peer_Protocol_Evaluation_in_Topologies_Resembling_Wireless_Networks__An_Experiment_with_Gnutella_Query_Engine.pdf

Daiwa EuroTelcoblog No. 75: Tuesday 14th September, 2004 - Supersize my VoIP

Skype has quietly revamped its website to show the cumulative number of PC-to-PC "minutes served" since launch, in an apparently ironic tip of the hat to McDonalds. The current total at this writing is 1.5bn, in a little over one year. That's 4m minutes per day on average over the past year, though obviously this is heavily backend-loaded given the growth in Skype users in the past six months. A purely anecdotal observation is that, as recently as two months ago, I typically saw 350 - 400k concurrent users on Skype. In the past couple of days, this number has consistently been in the neighborhood of 700k, and that is noticeably up on the 550 - 600k visible just a couple of weeks back. Respect.

Daiwa EuroTelcoblog No. 74: Tuesday 14th September 2004 - UPC Netherlands fires the opening shot

UnitedGlobalCom unit UPC Netherlands today launched the Dutch VoIP service which we wrote about recently (http://eurotelcoblog.blogspot.com/2004/08/daiwa-eurotelcoblog-no_10.html), and unveiled some specifics. Monthly subscription to the service is said in the press release to be "almost 50% less than" KPN's basic subscription (which is EUR15.26), with per minute calls priced 10 - 15% cheaper. The launch will initially be confined to Amsterdam and Rotterdam, expanding to the rest of the country early next year. Also, as previously announced, UPC will increase bandwidth for cable modem subscribers significantly from 1st October, with the top range product moving up to 8Mbps.

Also in the offing for October is a commercial trial of a 30Mbps cable modem product, followed by commercial launch, as well as a separate trial of a 50Mbps solution in Amsterdam. This latter development may have been prompted by some of the municipal fiber projects we have written about in the Netherlands (http://eurotelcoblog.blogspot.com/2004/07/daiwa-eurotelcoblog-no_23.html), and we're intrigued to know what the technology behind the trial is. Cable is producing some very intriguing alternative infrastructure solutions these days, such as Pulse_LINK (http://www.pulselink.net/) which harnesses Ultra Wideband over coaxial cable to deliver 1.2Gbps downstream and 480Mbps upstream. Whatever the motives and whoever the suppliers, this announcement from UPC today of a double-punch from VoIP and bandwidth upgrades, if replicated by the other two major MSOs in the Dutch market (Essent and Casema), may represent a real hammer-blow to KPN's residential business, and underlines our rationale for an UNDERPERFORM rating.

Resource update - a "work-in-progress" list of ENUM projects around the world

http://www.centr.org/kim/enum/index.html#41

Resource update - UMA specs online

Looking at the traffic flows into this site over the past few months, it seems that a fair number of readers have wandered in looking for more details on the technology underlying Unlicensed Mobile Access (UMA), as in the BT Bluephone and related fixed/mobile convergence proposals. Well, since last week the specs are online here http://www.umatechnology.org/specifications/index.htm. As a non-engineer, parts of it are duanting/unintelligible, but the consumer/service provider scenarios are interesting, as is the prominence of Wi-Fi as the bearer technology, versus Bluetooth, as in the first iteration from BT.

Daiwa EuroTelcoblog No. 73: Wednesday 8th September, 2004 - T-Mobile trials Flarion in Dutch market

(This went out as a client email at 8:00 AM London time today, but Blogger has been giving me major grief over the past several hours, which is why it only appears in the blogsite many hours later.)

Some time back, in profiling Flarion (http://eurotelcoblog.blogspot.com/2004/07/daiwa-eurotelcoblog-no_26.html) and speculating on who might trial the technology first in Europe, we stated that our money was on T-Mobile, and probably in one of its weaker markets, such as the Netherlands. Today this has been confirmed in a press release from Flarion, which states that a trial with friendly users is already active in The Hague. If it goes commercial it will be an important differentiator for T-Mobile in a brutal Dutch mobile market, and perhaps add further pressure to the lower bandwidth end of the residential broadband market in the Netherlands, which is where most of the real action has been over the past three or four quarters in any event. I.e., this is probably another good reason to be negative on KPN. We are still intrigued by the possibility that, as a shareholder in Flarion, T-Mobile may have some pre-emption rights over the technology in its European footprint, though this is speculation on our part. At the very least, we believe the UK market may follow as another area of deployment for T-Mobile, depending on the success of the Dutch trial.

Daiwa EuroTelcoblog No. 72: Tuesday 7th September, 2004 - I want my P2PTV

One of the themes we've been pursuing recently, both here and in the Daiwa Global Telecom Monthly, is that as broadband access speeds towards mass market penetration (i.e., commoditization) in many developed countries, the owners of the broadband pipes will increasingly feel an irresistable tug towards active content provision, if only as a customer retention tool. To date, we've seen concrete examples in Europe with France Telecom's MaLigne and Telefonica's Imagenio, KPN has announced a somewhat curious three pronged strategy (cable, DSL and digital terrestrial), and we fully expect that by year-end 2004 or early 2005 every incumbent in the European space will have at least announced its strategies in this area.

Our friend over at the fascinating Telepocalypse (http://www.telepocalypse.net/) recently made a strong case that "...voice and data telcos that try to get into video distribution are likely to get rapidly incinerated," which goes somewhat further than our own assessment of the situation, but is nevertheless a scenario we should consider. As we covered previously in our piece on Torrentocracy (http://eurotelcoblog.blogspot.com/2004/07/daiwa-eurotelcoblog-no_16.html), the very nature of content distribution is changing in some pretty fundamental ways, with, as one participant at the recent On-Demand TV seminar put it, "content moving about from PVR to PVR in some pretty alarming ways." Today's Creative Business supplement in the Financial Times, which carries a couple of stinging pieces on the renewal of the BBC's 10-year charter, seems to underline the point, arguing that changes in technology and consumer behavior make visibility in the broadcasting sector considerably shorter than 10 years:

"For half a century, broadcasting has been built on the existence of passive
viewers who largely had to take what they were given, which could too often mean watching the least worst option. And funding mechanisms, both the license fee and advertising, have significiant virtues but they both suffer a crippling
drawback - individuals cannot signal their particular preferences. With the
arrival of multichannel TV, this feature has been declining steadily in the past
decade, and will continue to decline in the coming one. The technology will
allow the emergence of a world in which most people can watch what they really
want to watch, and to pay for it directly, not through a poll tax such as the
license fee or through compulsory subscriptions to cable and satellite channels
they don't want."

Video is not the only arena where visibility is poor. Despite the much-heralded success of legal music download services such as iTunes, the revived Napster, and Loudeye, and the anticipation/trepidation which surrounds Microsoft's own plans in the area, audio content (which telcos also view as a potential revenue stream) still appears far from being in the clear. Our August edition of the Global Telecom Monthly discusses some of the alternative means being developed for content capture, such as The Bug DAB receiver from UK start-up Pure Digital (http://www.pure-digital.com/Products/Product.asp?Product=VL-60715), which contains an SD card for recording, and also the AudioXtract software from Jambalaya (http://www.audioxtract.com/?a=33883), which has so exercised the RIAA that it has begun to focus FCC attention on the issue of captured audio streams from internet radio and digital radio broadcasting (http://www.lessig.org/blog/archives/DAB%20letter.pdf), citing the UK experience in passing. Jambalaya's own September newsletter contains a letter from a user who underlines the appeal of the product:

"Anyway, thanks for a great product that I can use at school without the campus
Gestapo knocking on my door about Kazaa."

The past couple of weeks have introduced yet more variables into the equation:

• We were intrigued to learn of a development called the SlingBox from California start-up SlingMedia (http://www.slingmedia.com/), which allows users to view/listen to content streamed from their home cable/satellite/TiVo/stereo device via the web to other devices at remote locations. We are attempting to learn more from the company, but our initial understanding is that the SlingBox adaptor is connected to the desired device at home and can be accessed web-mail style and manipulated from another internet-enabled device anywhere in the world. This certainly poses some interesting and uncomfortable issues for the content and distribution worlds, as now both place and time become less relevant in the consumption of media.
• We were also interested to see the arrival of ATZIO (http://www.atzio.com/), which seems to be attempting to take the concept behind Torrentocracy (a P2P PVR) and make it palatable to rights holders by adding digital rights management to the mix. P2P then becomes the distribution partner, not the enemy, or so the marketing pitch probably goes. This is clearly something we expect to see more of, as we have previously seen with the Morpheus/Heart deal (http://eurotelcoblog.blogspot.com/2004/07/daiwa-eurotelcoblog-no_20.html) in the music sphere, though whether giving the file sharers a cut of the action will be part of future video deals is impossible to judge.
• More intriguingly, Newsweek yesterday reported that TiVo and Netflix are about to unveil a joint venture to allow direct downloads of video content from the web. We think this was pretty much an inevitable development, but given TiVo's other initiative (TiVoToGo, in which users are permitted to move content to other devices), there are again questions which arise longer term over how to control content flow, and perhaps build business models involving P2P distribution architectures.
• Lastly, and this is pure speculation on our part, we wonder about the 2GB (roughly the equivalent of three feature-length films) file transfer capability included with Skype 1.0. What we initially regarded as quizzical in a "voice application" appears distinctly different when viewed in the light of attempts to harness the P2P phenomenon in legal content distribution. We assume that the content owners did not share our initial short-sightedness. With over 20m downloads, 10m registered users, c.550k concurrent users on average, and - crucially - a growing number of SkypeOut users with live accounts linked to credit cards, should the entertainment industry not be exploring how to get sanctioned, protected content into the Skype pipeline?
  

As fits our long-term fundamental scenario for the sector, the telcos are largely absent from all of these developments, save for providing the pipe which enables it all to happen. Defining their position in the content sphere in a meaningful way beyond the access layer looks to be getting more challenging by the hour.

Daiwa EuroTelcoblog No. 71: Monday 6th September, 2004 - OFCOM interim policy on Voice-over-Broadband

UK super-mega regulator OFCOM has this morning issued a set of papers relating to its ongoing policy formulation effort around the Voice-over-Broadband issue in the UK market (http://www.ofcom.org.uk/media_office/latest_news/nr_20040906). Headline items at this point are:

• OFCOM has allowed broadband telephony providers to issue numbers in geographic number ranges 01 and 02, which theoretically opens up interesting number portability options for consumers. We previously feared that there would be a move to "ghetto-ize" such service providers in the 056 non-geographic number range, which is still available as a numbering option on an elective basis;
• In the absence of greater clarity from the European Commission on the legal basis of its classification of broadband telephony service providers, OFCOM has adopted an interim policy as regards Publicly Available Telephony Services (PATS). In contrast to standard practice, OFCOM has moved to allow new services into the market and to offer emergency services (999) calls without being required to fulfill all the requirements of a PATS classification;
• OFCOM is opening a public consultation until 16th November on consumer protection issues surrounding Voice-over-Broadband services, and has published a Plain English summary (http://www.ofcom.org.uk/consultations/current/new_voice/new_voice_pes/) and FAQ section which gives more flavor on the public face of this process (http://www.ofcom.org.uk/ind_groups/ind_groups/telecommunications/nvs_index/nvs_faq/).

Our cursory reading of the documents leads us to believe that this is, on balance, a positive result for the new entrants into the market. The number portability issue is a key one in our view, though there may some signficant complexities involved, as technically, only operators classified as PATS are currently allowed to port numbers. There are four conditions which PATS operators must fulfill:

• be a service available to the public
• enable originating and receiving of national and international phone calls
• give access to emergency services
• offer numbers in a national or international telephone numbering plan
  

Therefore, an operator could enter the market and offer a best-effort 999 service without being subjected to all PATS obligations, yet still qualify for number portability. Operators opting to avoid a PATS classification (an option OFCOM seems to favor in order to stimulate competition and consumer choice) would theoretically be excluded from number portability, which might significantly limit the commercial appeal of their service. Until the Commission clarifies its views on this issue, the current OFCOM halfway house is of uncertain longevity, in our view. It will be interesting to see, what, if any, tensions arise between the legalistic guidance from Brussels and the more common-sense spirit of OFCOM's policy to date.

OFCOM rightly seems to believe that the key to the market lies in consumer education rather than arbitrary regulation, and related to this issue, Annex 6 of the main document contains some interesting market research into attitudes towards emergency services reliability. Unsurprisingly, 91% of the adults surveyed expect to have access to emergency services from any phone, but 58% said that it is sufficient to have reliable access from one phone in the home. This suggests that, if only as a second line service, or perhaps among the 9% of consumers in the UK who use only a mobile phone at home, broadband telephony services have a considerable addressable market in the UK irrespective of the consumer protection issue. If a result allowing for a more permissive PATS framework comes back from the EC, then the picture for new entrants probably grows much brighter.