Tuesday, March 30, 2004

Welcome. In July 2003, I began publishing an email blast called EuroTelcoblog as part of my work as an analyst at Daiwa Securities SMBC Europe. Admittedly, using the word "blog" in association with a lowly email blast was a fudge, but now, as a new convert to RSS, I have decided to publish a proper blog in parallel with the email version.

This was born out of three main motivations:

  • a desire to get maximum mileage of the material beyond the narrow audience for which it was originally created;
  • a sense of mischief and intense interest in observing how disruptive technologies interract with and ultimately subvert rigid legacy structures (i.e., that of the company where I work);
  • the practical consideration that none of what I had written on these darker corners of the telco world had been recognized as "legitimate research" under the criteria for having said research entered into the company research database. Unable to sit by and see good work squandered, I took matters into my own hands.

Below follow the archived emails from this "pseudoblog" period. Some of the postings refer to research publications not contained in the EuroTelcoblog series, but contact me if you're interested in seeing them.

James Enck
European Telecom Analyst
Global Telecom Strategist
Daiwa Securities SMBC Europe Ltd.
5 King William Street
Direct line: 44 20 7597 8455
Skype: jimiinc
james.enck@dir.co.uk (n.b. this address no longer works, try james.enck@gmail.com)

Daiwa EuroTelcoblog No. 35, Thursday 25th March, 2004: Orange email debacle (original email blast 11:38 AM Thursday, 25th March, 2004)

Orange email debacle

Investors, or potential investors, in France Telecom (rating 4 UNDERPERFORM) might be interested to know that Orange UK (to which I subscribe) has had no outgoing email service for six days. I have had incoming email service over this six day period, as well as web browsing, IM and MMS capabilities, so there's clearly an outgoing mail server issue unrelated to the GPRS network itself. Yet another call to the Orange GPRS support desk this morning confirmed that the problem still exists and there is no estimated time of resolution given by the technicians at Orange Internet. I just tried to log-in to the Orange.net email page over a fixed line connection, but the link appears to be broken.

Those familiar with the "five nines" concept of service reliability (where the network or service should function 99.999% of the time - i.e., down time is only 5 minutes per year) will recoil in horror at the realization that, based on this week's performance alone, Orange.net is at 98.352% reliability and heading down fast. Sure, I could synchronize the phone to another webmail account, such as Yahoo!, but a) why should I have to?; and b) the people I really want/need to communicate with will use the Orange.net account to email me, because they assume (wrongly, in this case), that I will always be able to access it on the move.

We must ask, given all the lip service flying around the sector with regards to "seamlessness of customer experience" and "device-independence" of converged services, what could possibly account for a six day outage on a conventional email platform, especially when we're talking about one of Europe's largest ISP families? This sort of unfathomable customer service failing is why companies lose customers, and why consumers either fail to take up services offered by telcos, or alternatively, decide on a more reliable/satisfying platform for email and information services, relegating the access provider to "dumb pipe" status. Orange would make data revenue from me even if I did use third-party email on my handset, but my sense of connection with the Orange brand, and my goodwill towards the company, would not improve from where they are currently - which is at a very low level, and falling in tandem with the decline in service reliability...
Daiwa EuroTelcoblog No. 34, Wednesday 24th March 2004: CeBIT diary and reflections on DT investor day (original email blast 5:27 PM Wednesday, 24th March, 2004)

We visited CeBIT in Hannover, principally to attend the Deutsche Telekom investor day (which we discuss below), but also to drink in the rich atmosphere of the wider event, where attendance was up this year. This year offered many familiar sights, such as the wacky organ grinder serenading departing guests on the moving sidewalks (attachment 1), and the inconceivably large magenta T’s (attachment 2), but also much that was new.

The sheer size and scope of the event makes any unbiased appraisal of it virtually impossible, particularly for one-day visitors such as this author. Accordingly, the following account is characterized by our thematic biases, and is thus very subjective. Additionally, our colleague on the semiconductor and handset side, Kota Ezawa, gave a very good account of the handset scene at CeBIT last week (contact us for his piece), so we won’t spend any time on these issues, other than to say that there was indeed a huge buzz around the stands of handset manufacturers displaying megapixel camera phones and 3G devices, as well niche market suppliers such as PalmOne, whose Treo hybrid PDA/camera phone seemed to be attracting a lot of attention.

What was different this year

Last year CeBIT coincided with the beginning of mass market awareness of Wi-Fi technology, aided by Intel’s marketing push in support of Centrino. As we expected, this year is the year of VoIP in Europe, judging from the huge amount of VoIP-related stands in Hall 13, the first most visitors to CeBIT see.

There was still an awful lot of Wi-Fi stuff on display, but this year the focus seemed to be on how the technology can be harnessed, rather than the “wow, this stuff is cool” novelty aspect that prevailed last year. Lurking in Hall 13 we saw a couple of good examples, both Taiwanese manufacturers of 802.11 handsets, Senao and Tecom. We were most impressed with Senao, which demonstrated its SI-7800H handset (attachment 3) for us. Sound quality was great, and the form factor (20 x 44 x 125mm) and weight (83g) of the device would be entirely acceptable to the average mobile phone user in our opinion. The Tecom IP2050 device (http://www.tecomproduct.com/IP2050.htm) was less attractive, bulkier and features talk and standby times significantly shorter than the Senao handset (4 hours talk, 100 hours standby). We later saw a Finnish company called Convergens Oy which is marketing the Duravox 905 802.11 handset (http://www.convergens.fi/pdf/Duravox905_data.pdf) which also doubles as a wired Ethernet handset, and includes power over Ethernet for wired use and battery charging. These are interesting features, but the device is bulky (26 x 53 x 140mm, 145g), and though the four-hour talk time is identical to Senao’s, standby time of 24 hours is pretty short. Senao’s marketing representative was friendly and talkative, and suggested that a contract from a major US service provider was in the pipeline. He also indicated strong interest from carriers at CeBIT (we caught sight of the business card of the internet strategy director at a large UK operator among many left at the Senao stand.

The E-Plus i-mode stand was very active, as usual, and besides the greater variety of handsets on display, we also saw a demonstration of the next generation of Kodak image processing hardware which includes Bluetooth, to allow easier printing of camera phone images (the device also contained ports for the three common flash memory card standards). The E-Plus representative we spoke to was only a student under contract for the show, but he told us he believed the devices would be installed in selected E-Plus stores and that prints would probably be priced at around EUR0.50 each, which he suggested was a 100% gross margin price point. Whether this will represent a key source of incremental revenue for mobile operators in future, we can’t say, but we think it is an interesting illustration of how to extract value from camera phones beyond the MMS and data revenue aspects, particularly as mega-pixel cameras are coming into the mainstream.

Both powerline and satellite seemed to be more in evidence this year. We tried out the broadband satellite service from Astra (SES Global), and thought it was excellent. Powerline had its own “World of Powerline” superstand, where traffic seemed to be pretty heavy, considering that it is still viewed as a niche area by many. There also seemed to be a much heavier presence by Eastern European operators than we can ever recall seeing before.

We had a chance to stop by and see a demonstration of the Paradial RealTunnel product (http://www.realtunnel.com/), which enables firewall and NAT traversal for the MSN Messenger voice and video service, and were impressed. Video and audio quality were extremely good, even with bandwidth set to a miserly 82kbps. We expect this company to launch a public SIP service based on the RealTunnel capability, which should be worthy of further attention.

Most no-nonsense-stand-in-show award goes to Tele2, whose large-ish stand contained no products or equipment that we could see, and seemed to be entirely geared to signing up customers.

DT’s investor day

This event was less about numbers and more about management outlining its strategy and processes around generating growth in the three key areas of broadband, business customers and mobile. There wasn’t a huge amount of detail, but we did come away with a few extra data points, and a lot of insights into strategy. Clearly all three of these growth areas overlap to some extent, so rather than go through segment-by-segment, we have tried to synthesize the main messages from the presentations.

Building consumer broadband

DT is expecting to launch wholesale DSL from mid-2004, and to drive uptake is offering free line sharing from April 2004 to January 2005. DT is currently in discussions with RegTP with a view to halving the line sharing charge. As stated previously, DT expects to thus accelerate growth in the DSL market, to more than 10m lines by year-end 2007, and later cited a study predicting 12.6m by 2008, of which T-Online intends to have a 50 - 55% retail market share. T-Online is doing some interesting things with content, launching a paid music download service with 70,000 registered users at this point, and claims to be seeing strong interest in the Bundesliga football streams and paid Big Brother update clips. Most interestingly, the VoD service launched in November 2003 recorded 400,000 paid downloads to the end of 2003, just as a pure PC service. Now comes T-Online Vision (http://www.ihrfernseherkannjetztmehr.de/index.php?id=193), which brings broadband to the TV. Accompanying this is a push towards 3Mbps access at lower price points. Asked about the prospects for "naked" DSL in the German market, the response was that DT's strategy with AktivPlus voice packages was to lock users in to make them less amenable to such a scenario if ever it were to happen. The recently-introduced EUR4.22 per month bolt-on package offering EUR0.10 for calls lasting up to one hour was cited as an example.

T-Com’s CTO stated that he thinks DSL and Wi-Fi “have a great future together,” and the company (T-Com and T-Mobile jointly) is looking to accelerate uptake of Wi-Fi, both in public and in the home. DT is currently one of the largest retailers of 802.11 equipment in the German market, with over 200k units shipped at the end of 2003. On the device side, DT is also active, unveiling the T-Sinus wireless PDA device, which features a Microsoft Pocket PC operating system and both Wi-Fi and Bluetooth access. DT aims to increase the number of public hotspots available to its customers to over 15,000 globally by year-end, further extending the footprint via roaming agreements. In the German market, Wi-Fi will be marketed as an all-you-can-eat add-on for TDSL customers for EUR9.99 per month until October, after which the EUR9.99 price will include three hours of surftime, with overage charged at EUR0.08 per minute (ouch!). DT ended 2003 with 4,200 hotspots in the US, and 900 in Europe, and monthly run-rate revenues in the US rose from $400k in January 2003 to $1.6m per month by the end of 2003. This suggests that 4,200 hotspots are generating annual revenues of c.$20m, or roughly $13 per spot per day on average. Many of these locations in the States have backhaul over T-1 lines, suggesting a pretty poor margin on $400 average monthly revenue per spot.

Our own experience waiting for the flight to Hannover at the Gatwick Airport North Terminal, where there is a very prominent BT Openzone hotspot, suggested to us that usage in such commercial hotspots continues to be very low in Europe. We observed the spot for nearly two hours, and while many people (including us) took advantage of the swiveling laptop rests attached to the chairs (either to work or eat), no one was actually using Wi-Fi within the spot (attachment 4). Our work last year on the issue of the “virtually free” model (see PTT Pulse, issue 53, 21 March, 2003) suggested to us then that retailers and restaurant owners might scuttle the efforts of commercial operators, at least while extortionate pricing levels remain in place, as they do in Europe. Anecdotal evidence now suggests that this phenomenon is moving rapidly into the hotel segment in the US, where broadband internet access (via DSL or Wi-Fi) is increasingly viewed as an amenity of the hotel rather than a premium service. We think this bodes poorly for those investing heavily in a commercial model, though T-Mobile CFO Thomas Winkler stated the company’s view that the all-you-can-eat subscription plan ($19.99 per month for T-Mobile cellular subscribers, $29.99 for non-subscribers) has been a significant customer acquisition tool on the cellular side.


In the mobile operation, DT has adopted a brand identity of T-Mobile MultiMedia (tm3), with some clever marketing behind it (attachment 5). T-Mobile's CTO Hamid Akhavan hit the nail on the head in taking the industry to task for selling acronyms rather than services historically. By focusing on the tm3 concept, T-Mobile is trying to stress that 2.5G, UMTS and Wi-Fi are merely aspects of service. The focus for DT has moved towards a streamlined voice and data tariff structure, with pricing for data downloads uniform regardless of access. Much of this makes very good sense, particularly the move towards hybrid PCMCIA cards for laptops using a best-effort principle for network selection, and SIM authentication where possible, which allows integrated billing for T-Mobile customers. Relative to some European operators, T-Mobile has historically downplayed the significance of UMTS, though it confirmed for us that the company has built 6,000 UMTS cell sites to date in Germany, the UK and Austria, and will expand sites in these three countries to 11,000 by the end of this year (adding an estimated average annual OPEX of EUR30k per site per annum).

There was much to-ing and fro-ing with analysts on the subject of whether or not the cost efficiencies related to UMTS would lead to a collapse in average price per minute for voice, but DT management seemed convinced that tariff structures would stimulate voice minutes. Related to this however, DT revealed, for the first time, the total minutes of use for its European and US businesses, and we were surprised at the huge disparity between the two. Total European MoU in 2003 were estimated at >51bn minutes (we calculate that this means only 92 minutes per month for European subscribers) and >98bn for T-Mobile USA (this suggests 709 minutes per month, more than ten times the level estimated for Germany). Incentivizing European subcribers to take bigger minute bundles, which is DT's stated tariff strategy, looks challenging when they are apparently so reticent to talk. We will be interested to see what impact becomes visible from the launch of the Relax big bucket plans in the German market.

T-oIP? Nein, danke

DT is speaking the language of technology agnosticism in access, and in services it has made a step forward with the introduction of NetPhone, an IP PBX application for business with a user interface based in Outlook, a clear recognition of the VoIP phenomenon in the corporate space. This product apparently "opens up a new dimension of telephone functions," but apparently one which consumers will have to wait for, at least from DT. T-Com's CTO Roland Kittel claimed to see no reason to pursue opportunities in consumer VoIP products at present, if all that could be achieved would be a lower price point for a voice service less reliable than the PSTN. T-Com would invest, he said, when it could offer complete integration of voice and data services to customers. As with Swisscom management's comments today, DT's view seems to be that PSTN pricing is already sufficiently low that the marginal cost savings versus quality issues is an unattractive prospect for consumers. Mr. Kittel contrasted Europe with the US and Japanese markets, where ingredients such as high PSTN charges and affordable unbundling (Japan), and lack of PSTN-to-VoIP termination rates and imminent arrival of cable VoIP products (US) created a more conducive environment for uptake of VoIP as a consumer service. T-Mobile similarly downplayed the concept of a threat from VoIP over Wi-Fi or UMTS, again citing price differentials and quality issues as inhibitors.

However, we think both T-Com and T-Mobile are focusing on fixed-to-fixed and in-country mobile calling in their analysis, ignoring the potential for consumers (fixed or mobile) to avoid very un-trivial roaming and mobile termination payments by adopting access-independent VoIP. We have never argued that access-independent VoIP would completely obliterate PSTN voice revenues, but that the usage patterns were likely to be eclectic and focused on obvious price/location arbitrage opportunities. There are few more obvious in the European market than those of mobile termination and roaming charge by-pass. These are disproportionately lucrative product segments for all mobile operators.

It is interesting to note that in the hall directly opposite the venue for the DT event, two DSL operators were introducing access-independent SIP services for the German market. One, Broadnet Mediascape (http://www.mediascape.de/) looked more like a standard ATA-based service, but the much better known Freenet.de, has launched the iPhone, which offers both ATA and softphone interfaces (http://www.freenet.de/freenetiphone/). The softphone is free for use on a P2P basis, by any broadband user, though the break-out to the PSTN is restricted to Freenet.de DSL users. This is one of Germany's better-known ISPs, which nearly doubled its DSL subs in Q4 alone, apparently taking around 10% of net adds in the retail market. As we have long stated, we think a product like this could serve as an important differentiator for independent DSL players, particularly with the opening up of the DSL market in Germany, and we do not view this development as trivial.

DT unveiled much of interest at CeBIT, and a lot of what the company said seemed extremely reasonable. However, where we might disagree with management is in the conclusions we draw about the future. Our rating on DT remains 3 [NEUTRAL] and we look forward to more granularity around the inner workings of T-Systems through the analyst day on 1st April.

Daiwa EuroTelcoblog No. 33, Friday 19th March, 2004: Get organized - ITSPA is Europe's first voice-over-broadband industry association (original email blast 10:28 AM Friday, 19th March, 2004)

Get organized - ITSPA is Europe's first voice-over-broadband trade association

On Wednesday this week, we received a press release from the Internet Telephony Service Providers Association (ITSPA) of the UK, formally announcing its formation. As far as we are aware, it is the first industry association to come out of the voice-over-broadband (VOB) space in Europe. Previously, we have had contact with a couple of companies planning VOB launches in the UK, but we must confess to being pleasantly surprised by the sheer number of newcomers (13 members in all) willing to stand up and be counted on the regulatory issues at this early date, and we wonder if the rest of Europe has similar numbers of service providers ready to come out of the woodwork. Indeed, we wonder how many others may be lurking in the UK itself (we understand that at least one new member was previously unaware of the organization, and the organization was unaware of it, until recently). Given the issues raised in the OFCOM meeting (see EuroTelcoblog No. 31), we think the ITSPA will be looking to work proactively to persuade OFCOM of the need to adopt a light touch, and of the essential requirement for geographic numbering in fostering competition in the voice market. We look forward to following up with ITSPA members as the regulatory framework around VOB takes shape, and will update as appropriate.

Contact information: info@itspa.org.uk or sip:111@itspa.org.uk

Current ITSPA members

Call UK (www.calluk.com)
ET Phones (www.etphones.net)
Gossiptel (www.gossiptel.com)
Gradwell dot com (www.gradwell.com)
Idesk (www.idesk.com)
Imass Telecom (www.imasstelecom.com)
Intervivo (www.intervivo.net)
Magrathea (www.magrathea-telecom.co.uk)
Mistral Internet (www.mistral.net)
Speak2World (www.speak2world.com)
Telappliant (www.telappliant.com)
Telco Global (www.telcoglobal.com)
T-Strategy (www.t-strategy.com)

Daiwa EuroTelcoblog No. 32, Friday 19th March, 2004: The evolving fusion of social networking, blogging, moblogging and messaging/French cable consolidation/Pew research release (original email blast 9:36 AM Friday, 19th March, 2004)

Small Planet: The evolving fusion of social networking, blogging, moblogging and messaging

Harking back to issues covered in our blockbuster EuroTelcorama issue No. 5, we are keenly monitoring the fusion of social networking, blogging, moblogging and messaging into new hybrid communications systems. Recently we have seen the launch of ICQ Universe, a social networking approach to instant messaging, and somewhat amusingly, the first-ever music video shot on a camera phone, posted to TextAmerica (http://ghettron.textamerica.com/?r=455355). Yesterday we were alerted to the existence of Small Planet (http://www.smallplanet.net/) by the ever-excellent Get Real blog. As the review (http://www.corante.com/getreal/archives/002531.html) describes it, Small Planet is pretty close to what we had in mind - combining blogging and moblogging, social networking (personal and professional levels), and social activism/pooled purchasing power elements. Curiously, the messaging platform is email (unlike the advanced IM capability of Gush, which we covered here previously), though we think this is likely to change, either in Small Planet itself, or in a similar platform. Can voice IM be far behind?

French cable consolidation thick and fast

It's been a big week for French cable. Monday saw the announcement of the acquisition of Noos by UGC Europe (owned by Liberty Media), and today France Telecom and Canal+ have announced an MoU to combine their cable businesses (France Telecom Cable and NC Numericable) with a view to selling the combined business to a third party, and retaining a minority stake. One of the issues which has underlined our negative stance on FT is the potential for the underpenetrated broadband cable market in France to be reinvigorated by consolidation and de-regulation, and it looks like this change is gathering momentum. Cable plant passes roughly 47% of French homes, slightly less than the UK, and household penetration rates are similar to the UK at around 13%. However, cable claims only about 11% of the total broadband subscriber base in France, versus 43% in the UK, 38% in Belgium and 54% in the Netherlands. In terms of the likely financial benefits to FT of such a deal, we think FT's assets would be valued at c.EUR450m (and the entire newco at c.EUR850m), if we apply the EUR500 per customer valuation we estimate UGC paid for Noos. However, consolidation of the industry by someone willing to sweat the assets brings the prospect of more pressure on FT in the broadband market, and also the spectre of an intensified VoIP assault, this time focusing on cable subs. As an aside, we have had a final ruling this morning from ART on the terms for renewal of FT's GSM license in April 2006. Press speculation had pointed to a levy on revenues of as much as 5%, which would have added about EUR430m in annual costs to Orange France. The formula announced today is for an annual fee of EUR25m and 1% of revenues (c.EUR105m in total per annum), and as such comes as a relief.

Pew research release: Nomadic internet use and the impact of spam

The amazingly prolific Pew Internet & American Life project yesterday published two short memos which caught our eye. The first is on the issue of internet use in places other than work or home (http://www.pewinternet.org/reports/pdfs/PIP_Other_Places.pdf), and the main relevance it has for us is in the potential for browser-based softphones (such as the glophone, RingTime, and others such as MyTel http://mytel.ecs.net/) to see use in places other than the home. This might be particularly relevant in the case of the 18 - 24 segment, which comprises more than half of the estimated 30m people accessing the internet from a third location, and also in lower income groups, who may only have access in a third location. There's a business model in there somewhere. Interestingly, most of the analysis was based on surveys conducted in 2002, i.e., before the mass market pushes of 2.5G and Wi-Fi, and we wonder what the revised figures will look like. The second study relates to the growing level of frustration expressed by email users at the proliferation of spam (http://www.pewinternet.org/reports/pdfs/PIP_Data_Memo_on_Spam.pdf). The survey found that 29% of respondents are using email less because of spam, up from 25% in June 2003. Half of the sample said they had noticed no change in the volume of spam since CAN-SPAM was enacted, and 23% said they are receiving more spam (19% for work email accounts - and I can vouch for that!). This is relevant to us because of our interest in the growing spectrum of closed messaging systems, ranging from relatively simple concepts like zoemail to the highly encrypted darknets we have covered recently. It would indeed appear that a significant number of users may be frustrated enough to look for alternatives which involve communication solely within the user's defined group of contacts.

Shameless self-promotion corner

I have been invited to speak at the VON Europe (VON stands for Voice On the Net) event, which is being held 7-10 June, Olympia Conference Centre, London. Other speakers include:

Niklas Zennstrom, CEO, Skype
Lou Holder, SVP, Vonage
Geoff Haigh, CTO BT Mobility
Neil Ransom, CTO, Alcatel
Xavier Casajoana, CEO, VozTelecom
Mika Uutisitala, Director of Technology, Nokia
David Gurle, EVP, Reuters
Rod Hall, Director, Dresdner Kleinwort Wasserstein
Jeff Pulver, CEO, pulver.com
Scott Marcus (FCC advisor on secondment to European Commission)

The working agenda can be found here: www.voneurope.com/agenda. Apparently 75% of the exhibition space has been sold already, so it looks like it's going to be a popular event. I attended the event in Boston last autumn, and I found it to be a great place to interact with people and companies who are doing really interesting things.
Daiwa EuroTelcoblog No. 31, Tuesday, 16th March, 2004 - Just in - Documentation from OFCOM voice over broadband meeting of 25th February (original email blast 5:09 PM Tuesday, 16th March, 2004)

Includes the powerpoint presentation, summary of discussion session and list of attendees.


Daiwa EuroTelcoblog No. 30, Tuesday, 16th March, 2004: Notes and reflections from European Commission VoIP seminar/various (original email blast 2:27 PM Tuesday, 16th March, 2004)

Notes and reflections from European Commission VoIP seminar

Yesterday we attended the European Commission workshop in Brussels on IP Voice and Associated Convergent Services, in conjunction with a review of the Analysys report of the same name (http://www.analysys.com/pdfs/EC_VoIP_Report.pdf). The event was attended by around 250 persons, who we believe largely comprised representatives from carriers, national regulators and the telecoms consultant/analyst community (though we didn't see any brokers there whom we recogsnized). Carriers which either identified themselves or were known to us by sight included TeliaSonera, Tiscali, Telekom Austria, TP SA, London Internet Exchange and Skype. The event was largely devoted to Analysys' presentation of its report, which covers much ground which should be familiar to our readers by now (slides are to be found here - http://europa.eu.int/information_society/topics/ecomm/doc/useful_information/library/studies_ext_consult/ip_voice/analysys_presentation_on_voip.ppt), and the Commission has invited comment on the report at this address until the end of April (infso-b1@cec.eu.int). The report itself is very thorough and an interesting read, definitely worth the time commitment, but we don't intend to summarize it here. Our focus here is on the feedback session which followed, and the various takeaways we derived from the event as a whole.

Our summary points here would be:

If you feel confused after reading this - consider yourself well-informed. We think the subject contains a number of pitfalls and grey areas which will keep regulation lawyers in champagne for the next decade (too bad none of them are listed - they may be the main beneficiaries of the IP revolution!).

Regulators, carriers and the Commission itself seem to be continuing to come up with more questions than answers as to how to define the market, and on the economic externalities surrounding market definition.

Numbering and emergency services are likely to be the battleground where the action is fiercest, as the needs and interests of all stakeholders are most sensitive in these areas, and most susceptible to politicization, in our view.

By the time the dust settles, we think the market will have worked out its own solutions. Technology is evolving very much faster than the legal framework's ability to interpret it, in our opinion. As the Analysys team pointed out, one risk for regulators is that regulation which is overly specific may in fact spur the development of applications and business models created explicitly to circumvent it, or may have unforeseen impacts at a later date.

Feedback session

Following the Analysys presentation, the Commission's moderator, Peter Scott, head of DG InfoSoc, asked for the feedback session to focus on three issues: critique of the Analysys report itself, concerns about numbering issues and emergency service compatibility. This focus was largely maintained, but other lines of questioning found their way into the exchange. Sadly, the forum was too large to allow any meaningful interactive exchange on each individual comment/question in the time available, and Analysys/the Commission responded only sporadically. In the case of the Commission, remarks were measured on the whole, for obvious reasons. However, as a first crack at airing the concerns and opinions of the various stakeholders, the event was probably about as good as could have been expected.

Issue 1: Extraterritoriality

The feedback session opened with questions on the extraterritoriality issue - namely, if a user of a (for the sake of argument let's say a Vonage-type) VoIP service is in nomadic mode (using their "fixed" phone number in a location other than the country associated with the number), what is the country of origin of the call? Is it the country associated with the number, the country where the caller is located, or the country where the operator is based? What happens when the operator is based outside both countries (e.g., the glophone, where an American company issues an extended New York number to a user in Sri Lanka, who may be using it in Japan to call an American ex-pat friend in Argentina who normally lives in Chicago but has a New York phone number from Vonage)? What is the mechanism for protecting consumers in the event that a SIP proxy server located in a country outside the EU (let's say Russia for example) is shut down by the government/regulator? One Amsterdam-based lawyer enquired as to whether the country of origin treatment under the existing E-Commerce Directive would be sufficient to cover VoIP operators, in light of comments made by Analysys that services such as Skype might be more appropriately described as "goods" rather than "services"? The Commission was not forthcoming on this issue, though the chairman of Analysys remarked that in his view the situations were very similar.

Issue 2: Impact on SMP

UK super-mega regulator OFCOM chimed in to challenge an assumption made in the Analysys presentation with regards to the influence of VoIP on SMP designation. The example given in the presentation was the "Blast-me" premium service from Vonage, which forwards an incoming Vonage call to all numbers listed by the user, so as to never miss an important call. The principal author of the Analysys report stated that this service opens up the potential for the receiving party to determine which network receives termination revenue, and therefore may weaken the basis for designation of SMP for mobile operators in termination. Conversely, we might argue that in the European environment, the calling party is exposed to greater risk, because of the lack of transparency as to where the call is terminating, and therefore there are greater issues of consumer protection involved as well (in the US market the called party pays model makes this less relevant). We think the Analysys analyst, rather than suggesting an overhaul of the regulatory framework, was merely using this example to illustrate some of the discontinuities which regulators and operators will regularly encounter in convergent service offerings. The implication, as we read it, was that as such services gain scale, these discontinuities may indeed reach a level at which regulators can no longer afford not to reappraise the basis for regulation in certain defined markets. One issue which did not come up was the treatment of incumbent VoIP offerings. If we assume that BT and TeliaSonera's pre-emptive strikes are directional indicators for the incumbent sector as a whole, then we have questions over whether these products should be viewed as ancillary or niche products, or whether the incumbent's brand/marketing clout confers a certain influence which others do not possess. In other words, if incumbents are going to market these products to defend their positions, should they be compelled to offer them on a wholesale basis to competitors, as they must in much of the access and calls market?

Issue 3: Market definition

On the issue of market definition, the representative from TeliaSonera stated his view that the need to revisit existing relevant market definitions grows more urgent by the day, as an overly compartmentalized definition of the markets may serve as a disincentive to investment and competition. Analysys, though sympathetic to the view, commented that knocking down the existing definitions shortly after they have been introduced would do little to promote regulatory continuity (indeed we note that only half of EU member states have concluded relevant market reviews, which were to have been completed by 24th July 2003). Another attendee later questioned whether there was scope to impose a kind of open access obligation on mobile operators, given their position with regards to access and call origination within their own customer base (where calls to non-geographic numbers are frequently outside the calling plan). This may be the sort of issue which could become more of a flashpoint as 2.5 and 3G services continue to evolve. As we have written repeatedly in the past, relevant market definitions come under pressure and in some cases collapse within the IP environment. In the glophone example cited above, the transaction itself straddles mobile (because the users are physically away from the location associated with the number), local call origination (because the numbers making and receiving the call are nominally fixed line phones in New York City), domestic long-distance (because in fact the call is nominally being made from a New York number to a residence in Chicago) and international calling (both users are physically located in countries other than those associated with the numbers). Related to, but separate from this, are the externalities associated with taxation and universal service obligation. In this scenario, the governments of Sri Lanka, Japan, Argentina and Chicago are realizing zero revenue from the transaction, while arguably subsidizing New York on a number of different levels.

Issue 4: DIY

A European Commission member sitting in the audience stated that he felt the Analysys report had underestimated the potential for self-provisioning of services (for those who haven't read it, the report cites a do-it-yourself category of VoIP, in which users independently create a P2P session, but states that this sort of example may be limited to those with a high degree of technical expertise). He went on to pose the hypothetical situation in which a major software maker bundles a Skype-like application in its products - call us crazy but this sounds a lot like some of the speculation surrounding Microsoft's endgame with regards to the SIP functionality embedded within Windows XP. This is entirely consistent with our own views on the self-provisioning phenomenon, where what we see, both at the user, "service provider," and developer level is a steady and accelerating move towards greater independence in the development and provisioning of services. We have given some airtime recently to some emerging "darknet" applications (see EuroTelcorama No. 5 and EuroTelcoblog No. 27 for discussions of WINW and W.A.S.T.E.), where we see the technology barriers to self-provisioned communications networks potentially dropping rapidly. The Norwegian company Paradial, whom we are looking forward to visiting at CeBIT next week (Hall 6, stand H38), has a product called RealTunnel (http://www.realtunnel.com/), which enables the voice/video IM element of MSN Messenger to traverse corporate firewalls and network address translation (NAT), which would seem to offer the voice/video IM players some scope to improve their competitive positions relative to Skype, and to drive usage of the IM-to-voice/video click-though type described by BT at its BT Communicator launch last week. The service, which has received some favorable reviews in Computerworld, is currently free and the company is to introduce a public SIP service shortly. Even in the less glamorous arena of email, services like zoemail (www.zoemail.com) are testament to users' growing desire to define who they communicate with and on what terms. At the other end of the spectrum, the developers, we find phenomena like shtoom (http://sourceforge.net/projects/shtoom/), which is an emerging toolkit to enable developers to write SIP applications in a relatively straightforward manner using the Python language. We recently had a long conversation with the project coordinator in Australia, and he remarked that the voicemail function he was working on consisted of only about 50 lines of code!

Issue 5: Numbering

Numbering is a thorny and convoluted issue, and we remain none the wiser after yesterday's meeting. OFCOM, which was the only vocal national regulator present, claimed it is open to issuing geographic numbers in principle, though in certain cities in the UK, this might give rise to number shortages. The numbering plan could be changed to accomodate such a policy decision, but OFCOM claims to be wary of imposing additional costs on business in changing the numbering scheme yet again (residents of the UK will note the frequency with which we still see businesses, company stationery and vehicles displaying numbers from the old plan - 0171 and in some cases still 071, instead of 0207). Conversely, OFCOM claimed yesterday that some new VoIP players want the ability to offer non-geographic numbers in order to emphasize the "nomadic" nature of the service, though we think that some callers may be wary of non-geographic numbers due to limited transparency (this is particularly relevant in the case of calls from mobiles and in the "Blast me" scenario above). A representative from German regulator RegTP reported that it is currently in consultation over the allocation of non-geographic numbers - no mention was made of geographic number allocation. Tiscali listed regulatory uncertainty over geographic numbering first among the three big challenges it has encountered in introducing VoIP in Europe. The other two challenges cited are interrelated in our view - the inconsistent availability of wholesale line rental (WLR) and abuse of market dominance by incumbents. In the case of WLR, Tiscali states that the scale of its footprint is such that it can't gain adequate coverage solely through unbundling, and that ATM bitstream access has some technical shortcomings. On the abuse of market dominance issue, Tiscali's example was the bundling of calls and subscription (a key retention tool for the incumbents), though we expect that the issue of "naked DSL" (ADSL access with no PSTN subscription charge) may also become more controversial. The alternative carrier lobby is already very vocal on these issues, but we expect the Commission to come under increasing pressure to promote the separation of access and services in order to allow a more economically viable foothold for newcomers. Related to this is the issue of number portability, which one attendee pointed out had not been addressed by Analysys. We have seen Vonage customers porting numbers to the service in the US, but given the limited experience we have in the European scene so far, it is difficult to see how this will play out. Certainly, the bias so far seems to be towards non-geographic numbering, which would eliminate number portability as a marketing ploy for VoIP players, and the attitude towards emergency services expressed so far is also not promising in this regard. A Dutch consultant remarked that his company had undertaken research in the corporate market on behalf of OPTA, in which a significant number of companies indicated an interest in adopting a separate corporate numbering range and opting out of conventional national numbering entirely, which he believed raised the issue of how such numbers would be allocated and if there is consensus building around number auctioning.

Issue 6: Emergency services

Emergency services is always an issue to get the crowd going, and yesterday was no exception. TeliaSonera's representative spoke at length about the proliferation of false alarms and outright abuse that had arisen as a function of near-universal mobile penetration, and urged prudence in opening up the emergency services infrastructure to the inherent vulnerabilities of the public internet. Our impression was that his stance was that VoIP service providers should be prevented from offering emergency services, as seemed to be the implication of OFCOM's consultation paper on numbering from late February (http://www.ofcom.org.uk/consultations/current/vobs/vobs.pdf?a=87101). OFCOM stated yesterday that it sees hard-and-fast rules in this area as less feasible than a voluntary product labelling scheme on the part of operators. The Analysys analyst argued that applying the "duck" test (if a service appears to a consumer to be indistinguishable from ordinary telephony service, then it should be classified as such) might be overly narrow and impede competition. However, he also warned of the public outcry which would greet the first tragedy in which VoIP played a part, and the resulting backlash in the mainstream media ("Granny burns as regulators sit on the fence"). Conversely, in exempting "edge" operators (such as Vonage or Telio) from complying with emergency service obligations might set an unfortunate precedent for the long term, when players with SMP might also have moved entirely to such solutions. In such a scenario, where would the obligation for emergency services lie - with the access provider, with no one? At present, we think that the idea of barring operators from offering emergency services is inconsistent with the experience of the mobile market. Mobile handsets in Europe must be able to dial 999/112 even if outbound calls have been blocked by the operator, the keypad is locked or the SIM card removed. However, the ability of authorities to pinpoint the location of mobile callers is still sketchy at best, and mobile coverage itself is still far from perfect. Nevertheless, mobile networks have never been barred from offering emergency services on this basis, and it seems odd that we are hearing such a reactionary bias at such an early date in the VoIP story. Moreover, the penetration of DECT cordless phones in Europe often makes emergency calling from a fixed line a less-than-perfect proposition in the case of blackout or battery failure. The Vonage solution, which requires some active involvement and responsible behavior from the user (informing the company if the address associated with the number is going to change due to travel or relocation), is surely better in an emergency than nothing at all.


We think yesterday's event was a good impetus to further discussion and consideration of the complex issues around definition and regulation of IP services in Europe. We think the issues are suitably complex that both the Commission and the national regulators must tread lightly and prudently in order to avoid adverse outcomes for consumers, competition and existing carriers. Asked point blank whether the Commission was in "promotion mode" or merely trying to increase information flow, DG InfoSoc Chief Peter Scott commented that the majority of conversations he has with stakeholders are on the issue of implications and interpretations of the Framework. Thus in the short-term we think the Commission is working towards consensus building and consultation, though Mr. Scott went on to say that in the long term IP services might have the potential to bring "real competition" to Europe. From this we conclude that the Commission is broadly supportive of technical innovation in the longer term, tempered by the need for transparency in the interim. Between the short and long terms lies a lot of uncertainty, in our view, primarily at the national level. OFCOM may be in consultation mode, but our conversations with internet telephony service providers in the UK give us the impression that they believe numbering, consumer protection and emergency services issues are moving in a direction which is unhelpful. The relative lack of input in yesterday's session from other national regulators suggests to us that many face a steep learning curve in addition to the challenges of transposition to the New Regulatory Framework. One lawyer present yesterday asked how the Commission would deal with assymetrical definitions of publicly accessible telephony service (PATS) at national level (she asserted that some countries had omitted references to emergency services compatibility from their national regulations), and the response was that the Commission would work to ensure uniform transposition to the NRF. Unfortunately, this was greeted by laughter in the audience. Clearly there are other issues merely beyond the NRF, its application and the Commission's ability to impose order - foremost among these is the rate of technology change, which we would argue is already rendering parts of conventional regulatory definitions of limited use. We think that the pace of technology change is already outstripping that of institutional reform, and that by the time the official response has been codified, the market being regulated may bear little resemblance to the applications being used by consumers. More worryingly, when such a large group of qualified and intelligent people as we were with yesterday finds it so difficult to even roughly estimate the rate and extent of change coming, we are clearly sailing in uncharted waters, which have the potential to deliver some profound positive and negative surprises for many market participants. Much of the incumbent segment in Europe has taken a serious beating in the past few sessions, but yesterday only reinforced our long-held view that visibility is deteriorating rather than improving. We continue to maintain a [NEUTRAL] stance on the European incumbents.

Daiwa EuroTelcoblog No. 29, Thursday 11th March, 2004: BT Consumer Broadband presentation (original email blast 3:30 PM Thursday, 11th March, 2004)

BT Consumer Broadband presentation

BT today held an event (including lunch!) at BT Tower in London which was aimed at the press/industry analysts (Analysys, Gartner, et al), with lowly brokers' analysts relegated to a webcast (note: there was a separate conference call later in the day with an analyst Q&A session). The presentation contained a plethora of interesting information and insights into BT's evolution and its efforts to harness the increasingly chaotic IP revolution to its own business agenda in driving DSL penetration from 2m currently to 5m by 2006. There were repeated references to the proliferation of communications platforms/environments, to the change in the market being customer-driven (familiar themes to those who read our EuroTelcorama No. 5), and to the need for BT to "excite" the market with new services in order to capture the second wave of broadband adotpers and retain a retail DSL market share above 40% (46% currently). In our assessment of the PTTs under our coverage, BT has for some time received top ranking in terms of adaptability, and today provided more evidence of management's market awareness and intention to attempt to co-opt disruptive offerings from newcomers. We will continue to reassess our assumptions around our BT forecasts and valuation, but for now we retain our fair value estimate of 173p and our 3 [NEUTRAL] rating.

Today's event revolved around four key new initiatives in BT's broadband strategy:

The launch of BT Communicator in September, in conjunction with Yahoo! This is effectively a co-branded, modified version of the Yahoo! enhanced voice/video IM platform, but including break-out to the PSTN.

The introduction of flexible bandwidth provisioning and incremental bandwidth purchasing via an online solution, in tandem with the introduction last week of its Broadband Basic product (512Kbps DSL with a 1GB monthly data cap).

The introduction of Rich Media on 6 April (in a separate launch event), which will provide content publication and digital rights management tools to content providers, at a price point which BT believes will stimulate content creation and distribution over its platform, not only from established media players. BT will retain a fee for each transaction effected over this platform.

The introduction of a remote management tool allowing for remote diagnostics and application management of the BT ADSL customer's PC.

BT Communicator

Of primary interest to us here is the BT Communicator, which allows free on-net voice/video calls, and a break-out to the PSTN at "standard call rates," though BT is intending to integrate the service with existing BT Together packages to drive further customer loyalty. At this point the service only supports one-to-one video calls, but a four-way video conferencing feature is in use by over 100 trial user groups at present, and is anticipated to be ready for launch in September. Numbering for the service is still in development, in consultation with the regulator, with a trial number range currently employed. (This is one key area of dissatisfaction we have heard voiced by the independent internet telephony service provider segment in the wake of the OFCOM voice over broadband meeting of 25th February. At this point it would appear that OFCOM is leaning towards "ghetto-izing" voice over broadband services by means of non-geographic numbering [056 is proposed], which we believe may make the market somewhat harder to crack for newcomers. Arguably one of the key areas of appeal for services such as Vonage and voiceglo in the US market has been the ability to sell standard NANPA numbers to consumers - an option they may be denied in the UK. BT is coming at the issue from the opposite direction, as an incremental service offering on its broadband platform, and so presumably it is not particularly disturbed by this development.)

A couple of interesting consumer behavior insights came out in the discussion of the product. According to BT's figures, one in ten instant messaging sessions culminates in a phone call, and in the youth segment where IM use is so prevalent, this is invariably over a mobile phone. BT has often spoken in the past about the need to claw back revenue lost to mobile usage within the home, and this development is consistent with that goal. By allowing a click-through from the IM interaction to a voice/video call, there may indeed be an opportunity to recapture some revenue within the youth segment. The marketing of the BT Communicator will consequently be heavily targeted at the estimated 2m current users of Yahoo! IM in the UK. There was also much made of the unified messaging features (calendar interface for "follow me" functions, etc.) embedded in the product as a differentiator. In notable contrast to the Broadband Voice product, on-net calls are free under BT Communicator, which brings the service more into line with comparable offerings from SIP service providers.

With the BT Communicator, it appears to us that BT is attempting to co-opt service offerings at both the Vonage and Skype ends of the VoIP spectrum (IP to PSTN for a fee and P2P for free), while also attempting to address/harness the threat from enhanced IM in partnership with one of the most accomplished players in this area. As such, it is an impressively aggressive response for an incumbent to make. Retail CEO Pierre Danon remarked that BT would rather cannibalize itself rather than be cannibalized, and that there were also opportunities to stimulate new usage via the product (the mobile claw-back scenario covered above). We agree in principle, but we still expect the market to grow increasingly disorderly, and in actually driving forward change, there is always a risk that change will not occur according to BT's timetable. We think one other risk for any incumbent seeking to drive change is to underestimate the innovative ability and speed-to-market of newcomers. BT crossed this line today, characterizing Skype as comparing "unfavorably" with voice IM platforms, and being "absolutely primitive" in comparison to the BT Communicator. Them's fightin' words, and we would expect a response sooner rather than later.

Two issues not raised by the journalists (there was no Q&A facility for those of us on the webcast) were the potential for: 1) Skype to break out to the PSTN imminently (we know the technical solution exists via an interface with SIP gateways, and we think billing could be achieved via a prepaid model - regulation is probably the more difficult challenge for such a global player) and; 2) for the c.350 DSL service providers in the UK to further accelerate pricing pressure via their own partnerships/white label agreements with VoIP specialists. Yesterday's announcement from deltathree seems to have gone completely unnoticed so far, and indeed there is no sign of it in Wanadoo's website today, but we think it is a pretty clear illustration of the likely response from those in the broadband market looking for product differentiation and incremental revenue streams.

Flexible Bandwidth

In tandem with the GBP19.99 1GB capped DSL service introduced by BT last week under the Broadband Basic name, BT today introduced an online, real-time bandwidth provisioning system for users of the service. This involves both purchase of incremental download capacity, but also variable bandwidth at user-specified times. In the case of the former, users of the capped service who had reached their 1GB limit would be prompted to top-up, or spend the remainder of the month on a 64kbps dial-up service, until their next 1GB data bundle came into effect the following month. In the case of the bandwidth accelerator feature, the user can move from 512kbps up to 2Mbps speed online in real time, and the adjusted speed stays effective until the user resets the bandwidth to the original setting. BT confirmed that it has included parental control features to address any concerns over costs arising from clandestine file-sharing within the family. The service is currently recruiting users for a consumer trial to begin next month. One additional feature included here is ability to upgrade or change DSL packages online in real time.

Our reaction to these innovations is that they are a shrewd marketing tool aimed at accelerating mass market penetration (BT claims that the 1GB capped service would be sufficient for around half of potential DSL users) while generating high margin "overage" charges (allowing higher speeds to capped customers accelerates the rate at which they reach their cap and must purchase more capacity). The price point of GBP19.99 is relatively attractive as an entry point for new broadband converts (though the real cost of ownership is considerably higher when we consider the GBP30 activation charge, GBP50 modem charge, and premium rate call charges for telephone technical support) and the company has provided a seamless way for users to upgrade to more expensive uncapped packages if they determine it is in their interest. As such it may prove both a market accelerator and an incremental ARPU generator at the margin. Our concern is that, in offering a capped service, BT may have opened up scope for other ISPs to exploit this issue in their marketing (NTL tried caps last year and has now backed away, and the geek sites and mailing lists we follow have roundly blasted the Broadband Basic product over the past week). Nevertheless, management today claimed that DSL sales volumes have increased in the nearly two weeks since Broadband Basic was announced, with no evidence of product cannibalization (downward migration) so far.

(Personal anecdote: Shameful though it may be to admit, this author has yet to make the broadband conversion, though we have finally signed up to NTL and should be live next week. The contrast with the BT service gives some evidence as to the ongoing challenges BT faces in the broadband market. When we enquired about BT Broadband we were told that modifications to our access line (replacing the second line with an extension from our primary line to the bedroom, where the computer is) would involve a chargeable engineer visit at an estimated cost in excess of GBP100. Following the upgrade we would be paying GBP28 per month for the standard 512kbps service. In contrast, NTL offers free installation (including modifications to the site), an introductory price of GBP10 per month for the first three months, and GBP25 per month thereafter for 600kps cable modem service. Our order was processed in one minute over the phone.)

BT Rich Media

The third interesting area of today's announcement was the Rich Media service, about which we should hear more on 6th April. The description so far is of a content publication and rights management toolkit available to content producers at a cost of under GBP100 per month, with BT taking an as-yet undisclosed commission on downloads or other purchases transacted on the platform. The comparison with i-mode is one which Pierre Danon himself highlighted, and is valid in our view. Management piqued our interest in discussing the potential for growth from independent content providers, not just "the usual suspects" of the media world, though they did claim to have signed letters of intent with 23 established media companies in the US and UK. One example given of the potential of the independent angle was the Star Trek fan club, which has seen 3m downloads in eight weeks since it began offering content via its own site. The company believes that this model, applied to ethnic groups, sports clubs, hobbyist groups, etc., offers BT the chance to generate revenue both from the syndication and transaction standpoints, and we are keen to know more.

Overall, we thought today's presentation once again highlighted BT's forward-looking approach to the changing dynamic of the market, which we believe is well ahead of many of its peers in Europe, and may serve as a template for announcements by other PTTs later this year. We should get more information on 6th April at the Rich Media launch, and on 29th April, when BT is due to hold another presentation focusing on strategy within the business segment, which we believe will contain more information on enterprise IM/VoIP solutions similar to what we saw today. Impressive as today's presentation was, we still have fundamental concerns over the true scope for all incumbents to control the pace and direction of change within their own businesses/markets. BT, though at the forefront, is no exception. We will continue to re-evaluate our assumptions on the stock, but retain our 173p fair value estimate and 3 [NEUTRAL] rating.

Daiwa EuroTelcoblog No. 28, Wednesday, 10th March, 2004 - NEWSFLASH! deltathree and Freeserve to launch SIP product in partnership (original email blast 1:55 PM Wednesday, 10th March, 2004)

Currently in the middle of the Deutsche Telekom conference call, but the press release has just arrived. International SIP service provider deltathree (DDDC US) and Freeserve are to launch a co-branded version of the iConnectHere service in the UK in Q2, targeting Freeserve customers. One example of the calling plans on offer is the North America 400 plan - 400 minutes to North America for GBP2.95 per month. This is particularly interesting, as we had perhaps naively assumed that the incumbents would follow the old adage "you shouldn't foul your own backyard" in dealing with the VoIP issue. Yet here is France Telecom effectively using SIP as a revenue expansion opportunity into an adjacent market. The timing of the announcement is also interesting, coming as it does one day ahead of a BT broadband strategy presentation, on a day when BT's share price is strongly bucking the negative trend in the sector today.
Daiwa EuroTelcoblog No. 27, Friday 5th March, 2004 - Vonage goes to the mall/Darknets + voice = ?/ICQ goes social (original email blast 2:29 PM Friday, 5th March, 2004)

A few additional data points and developments to close out the week:

Vonage goes to the mall

Vonage has today formally announced the conclusion of a marketing deal with US electronics retailing giant Circuit City, which will carry Vonage products in all 600 of its superstore locations, as well as online via www.circuitcity.com. This is a significantly larger deal than either of Vonage's previous arrangements with Radio Shack and Best Buy, and we think it really takes Vonage into the mainstream of American retailing. We have previously maintained that landing US deals of significant size, such as this one, would probably serve the company well as it prepares for an imminent European launch. We can only speculate as to what sort of retail partnerships might be in the pipeline related to the UK launch, but given that BT's own "Broadband Voice" product is available only online, we think a high-street presence would be a significant competitive advantage.

Darknets + voice = ?

Back in our sector report of 30th January, we spent some time pondering the potential impacts on traditional voice of "darknets", i.e., highly-encrypted, self-provisioned P2P communications networks. We discussed packages such as WINW, which aims to provide a compact and straightforward application to allow the creation of precisely such networks. WINW is an ongoing independent project initially inspired by W.A.S.T.E., the abortive P2P package released and immediately withdrawn last year by AOL subsidiary Nullsoft, and is primarily focused on instant messaging, file sharing, and collaboration between a defined group of member users. The W.A.S.T.E. project itself has been taken up by another group of developers (https://sourceforge.net/projects/waste/) who launched Version 1.4 alpha 2 release last month. W.A.S.T.E. is similarly focused on IM and file-sharing, and we understand that the level of encryption is a healthy 1024 bits.

Beyond the concept of creating an invitation-only communications network that is effectively invisible to the outside world, the thing that interests us about both of these developments, is that neither of the project developers had originally envisaged including a voice component. The last time we checked this was still the case with WINW, though it seems to be an issue of interest longer-term. In the case of W.A.S.T.E., the project coordinator told us this week that such an addition would be quite possible if another developer were interested in getting involved in coding a voice module.

We might be going out on a limb here, but if things progress in the manner which we suspect they will, then we have to entertain the idea that at some future date the telcos may confront not just VOIP as a commercial/competitive phenomenon, but also a plethora of self-provisioned mini-Skypes (we think each W.A.S.T.E. user group could accomodate around 50 users). However, unlike the rather more obvious agendas of commercial VOIP competitors, these mini-Skypes would have no revenue model and no agenda other than providing secure, private and reliable communication between friends, for free.

ICQ goes social

One other bit of harmless speculation we raised in our January report was that social networking groups could be modified to include other forms of interaction/communication, and that this might pose some hard issues for telcos longer term, if it channeled users' time and voice communication patterns away from the PSTN/mobile or other content which they were seeking to promote. This week brought the interesting revelation that instant messaging platform ICQ is taking the concept on board, but in reverse. ICQ has launched ICQ Universe (http://universe.icq.com/universe/welcome/1,,,00.html) which employs the degrees-of-separation principle in an IM environment, and employs standard social-networking features such as photos, character descriptions and testimonials.
Daiwa EuroTelcoblog No. 26, Wednesday, 3rd March, 2004: Updates on - This week's new VoIP discoveries/clarification on the BAFO box/the VoIP dichotomy/FTTH/blogging critical mass (original email blast 11:07 AM Wednesday, 3rd March, 2004)

It's only Wednesday, but there is no let-up to developments in some of the darker corners of the sector which we probe. Most of what follows builds on recent themes discussed in our sector piece EuroTelcorama No. 5 and subsequent issues of EuroTelcoblog.

This week's new VoIP discoveries

As is often the case, one of our readers yesterday gave us a steer towards a couple of interesting developments, this time out of private Dutch company Anoxsoft. One, RingTime (www.ringtime.net) is an amazing-looking browser-based arsenal of communication tools, including video and voice IM. We understand that the voice codecs work down to 14.4kbps, making it suitable for the usage scenarios we outlined in our piece on the glophone last Wednesday. One difference is no breakout to the PSTN, though we understand the company is working on that. However, RingTime incorporates other features more common to social networking and collaboration applications - personal profile data, shared document repository, shared bookmarks, multi-user conference facility, and text/Excel/Powerpoint editor functions. We're looking forward to test-driving it. The other Anoxsoft product of interest is InterTalk (www.intertalk.net), a blackbox appliance designed to allow companies to install do-it-yourself VoIP between branches with no need for desktop VoIP phones or modifications to the legacy PBX. We are currently trying to establish contact with Anoxsoft to discuss both of these developments further. We will update as appropriate.

Clarification on the BAFO Messenger Call Box

In issue No. 23 of this "blog" (as well as in the February edition of our Global Telecom Monthly) we discussed the Messenger Call Box product from Taiwanese company BAFO Technologies, which claims to terminate voice IM "calls" on a telephone. At that point we had not been able to get clarification from the company as to exactly how this was accomplished, but last week were had a short conference call with a couple of company representatives in the US, who set us straight. Some clarification is in order. It turns out that the product is actually a much more straightforward affair than we had initially suggested. Instead of the complicated SS7 transaction we had envisaged, the USB device actually connects with the user's wireline phone, where incoming calls are either terminated or forwarded, depending on the preferences of the user. This is where our billing question is answered: call-forwarding to the PSTN is the financial burden of the receiving party. However, if we consider some of the scenarios in which the box is likely to see use (such as a consumer in the UK receiving what are effectively free "voice calls" from relatives overseas), the cost of forwarding the call to a PSTN phone, even a mobile, may be relatively minor compared to the cost of a normal international call had it originated on the PSTN. The box itself is to retail for $79 when launched in Q2, and though the company originally envisaged selling it globally through the normal retail channels, there has also been significant interest from a number of ISPs. We await more details as the product launch nears, and believe the company may be displaying at CeBIT.

Clayton Shirky on the VoIP dichotomy

Clay Shirky has published an interesting piece on the dichotomy developing in the VoIP market (services connecting to the PSTN and those which do not) which covers many of the issues we have been discussing for some time, and comes to some similar conclusions, if mainly from a US regulatory perspective. In light of recent moves on regulation of access-independent VoIP in the UK (ghetto-ization of numbering into a non-geographic range), however, it may have more resonance here than previously thought. Definitely worth reading (http://www.shirky.com/writings/voip_a_b.html)

Municipal FTTH projects - how incumbents sound when they feel threatened

In EuroTelcorama No. 5, we discussed municipal network infrastructure projects as an emerging issue for incumbents in the access layer, and one US example we delved into was the UTOPIA project in Utah, which seeks to use municipality-backstopped bonds to fund network build to link every address in 18 Utah municipalities to 100Mbps fiber within the next three years. Having gained approval from roughly half its participating city governments, the UTOPIA project has been threatened recently by a bill in the Utah State House of Representatives. The FTTH Council last week formally stated its opposition to the bill (SB66), stating "This bill was clearly drafted to kill the Utopia and iProvo FTTH initiatives. The growing FTTH market in this country today has benefited greatly from the advances made, lessons learned, and price declines created by municipal FTTH deployments. Less than a year ago, Utah was considered a hot bed for FTTH and one of the country's technology leaders. Should this bill pass, Utah will be relegated to the back of the communications pack, with the population likely destined to the limitations of legacy copper or other broadband-inadequate networks."

The link below is to a one-hour radio debate between the head of the Utahns for Telecom Choices and the Community Affairs Spokesman for Qwest, the local incumbent, which has come out in vociferous opposition to the project. Interesting issues are raised early on, when the Qwest spokesman claims it is unfair that Qwest should have competition from governmental bodies with tax exempt status, to which UTOPIA retorts that Qwest's legacy network itself was created and functioned in just such an environment for decades. Listeners calling in voice the full range of pros and cons, informed or not (one caller strangely chooses to compare a fiber network investment to investments in nuclear reactors), and things get a bit personal towards the end.


Blogging is a force to be reckoned with: Pew report on online content creation

It is interesting to see a feature on blogging as an enterprise application creeping on to the front page of the Financial Times IT Review section today, and the connection made with instant messaging is another familiar one to us. The intrepid few who actually soldiered on through our recent sector report will note that we discussed the blogging phenomenon as one which we considered to be negative for telcos at the margin, either as an alternative form of communication/information distribution, or simply as an alternative use of time. We also covered in No. 26 of this "blog" the fusion of RSS and instant messaging known as Gush. Just this week comes some additional insight into the scale of the blogging phenomenon. The always excellent Pew Internet & American Life Project on Monday issued a report on online content creation. It determines that 13% of US internet users have their own website, 7% have webcams which they use to post images to the web, somewhere between 2% and 7% of American Internet users have created blogs, and about 11% of Internet users are blog readers. As the author of the report states, "These are not hugely impressive figures, but they are hardly trivial. They mean that anywhere from 3 million to nearly 9 million Americans have created these diaries...The world is changing in major ways when anyone with a modem can do the same thing as the most sprawling media company, the most powerful politician, or highest-paid entertainer."

A financial vote of confidence for social networking

Another issue we covered in our sector piece, which some readers probably thought was irrelevant if not downright crazy, was the issue of social networking sites such as Friendster. Our interest, again, was in the phenomenon as a source of alternative communication activity for consumers, and consequently revenue erosion for incumbents, especially if these sites begin to incorporate more sophisticated communications tools for users (users of Friendster already spend around three hours a month in the site!). Now it seems that at least one billionaire feels the concept can be monetized. Barry Diller's Interactive Corp Monday announced the acquisition of the ZeroDegrees social networking property for an undisclosed sum.

Daiwa EuroTelcoblog No. 25, Wednesday 25th February: glophone - another global troublemaker/Gush - IM meets RSS, what's next? (original email blast 5:19 PM Wednesday, 25th February, 2004)

Our recent sector piece (EuroTelcorama No. 5, 30th January, 2004) attempted to bring together some diverse strands of the IP world - access-independent VoIP, darknets and invitation-only networks, blogging, social networking - in arguing that the avenues of communication, and the technologies enabling it, are broadening for the consumer, with potentially serious impacts on traditional revenue streams for telcos, who we think are poorly-positioned for this transition. With each passing day we discover further developments which strengthen our conviction. This longer-than-usual edition seeks to delve into a couple of recent discoveries worthy of consideration.

glophone - another global trouble maker

We think there has been a fair level of investor frustration over the fact that the two best-known proponents of access-independent VoIP, Vonage and Skype, are unlisted companies, and we expect that some of the enthusiasm for the broader VoIP theme in Europe has been channeled into Iliad SA, as a kind of proxy (though the influence of the Yahoo! BB story is undoubtedly significant as well). In the maelstrom of information coming out of the sector recently, and particularly around VoIP regulation in the States and now in Europe, we think a potentially very significant product launch has gone largely unnoticed, from a listed company called theglobe.com (TGLO US). (Careful readers of our Global Telecom Monthly may note that we have this company in our global model portfolio.)

On 12th February, theglobe.com, which trades under the name voiceglo (www.voiceglo.com) in the US, released a new product called glophone, in a clear departure from its original product strategy, which is very similar to that of Vonage. The glophone is a patent-pending browser-based SIP client which can be accessed from any internet-connected computer without an additional software download, beyond the initial 300KB download to to the user's "home base" PC in order to configure the service. Once the account is configured for mobility, it functions more or less like a webmail account (think Hotmail or Yahoo! Mail), though the user receives a North American Number Plan (NANPA) phone number with four digit extension. The user only needs access to a microphone and speakers, or to a USB headset available from voiceglo for free. The voice codecs apparently are robust enough to function in a narrowband environment (Company president Ed Cespedes told us he used the product over narrowband recently while visiting his ancestral home in Peru), and full PSTN connectivity is possible. Calls to other glophone users are free, and the registration for the product is free for "P2P" usage.

For a $20 upfront deposit and $1.99 per month, the subscriber can make calls to US and Canada numbers for 3.9 cents per minute, and receive standard voiceglo discounts on international calling. For $3.99 per month, the user receives the same rates, but also added features such as voicemail, voice2email, caller ID, call waiting, call forwarding, 3-way calling and conference calling. For $24.99, there is unlimited calling to US and Canadian numbers.

To date, voiceglo has seen a few tens-of-thousands of downloads, with a conversion rate to paying customers of around 7%. As with Vonage and similar products, billing is done via credit card, and the upfront deposit also hedges credit risk. We think that the gross margin on subscription is around 70% (let's say $2.00 on an average subscription rate of $3.00 per month), and similarly high for calls billed at 3.9 cents per minute (based on an estimated termination cost of 1.9 cents and falling). At an average monthly ARPU of $7.00 (subscription and calls combined), we think the glophone may generate a gross profit of around $4.00 per month per sub, and management indicated to us that the product would be cash positive at around 300,000 subscribers.

How reasonable an assumption is 300,000 subcribers, when Vonage may have better brand recognition in the US market? We think the answer is that we're talking about completely different markets. President Ed Cespedes cites a high level of USB headset orders originating from Central and Eastern Europe, indicating that there is significant uptake outside the US. The fact that this is a browser-based, rather than a hardware or softphone based application, which interfaces with the PSTN using standard numbering, is what we believe makes the glophone such a potentially significant step forward in the VoIP challenge to the traditional telco business model. Let's think about this for a moment:

glophone allows anyone, anywhere in the world with the financial means to cover the nominal deposit and monthly fee, to have a NANPA phone number, and to make calls to the US or Canada as though the calls were made "within" the US and Canada. Accordingly, users can benefit from the relatively economical outbound international rates to other countries, because the call is "originating" from North America. Theoretically, an Argentinian glophone user should be able to call Brazil from his "American" number for a fraction of what a direct call between the two countries would cost.

The above are classic examples of international SIP location/pricing arbitrage, but with no client software on a dedicated device or cumbersome ATA to carry around, and apparently possible from a narrowband connection. (In practice, we think there may be users of Vonage or similar services who are achieving the same thing, though this is at odds with the strictest interpretation of their terms and conditions. Vonage requires a US or Canadian mailing address for registration to its US and Canadian services.)

Most of the commercial SIP products we have witnessed and written about to date have been marketed on a single country basis, and we are in the early stages of some regional and pan-European product developments. However, the glophone is arguably a global product from day one. As such, it may have more in common with Skype or Free World Dialup than Vonage, yet being browser-based (or device independent is perhaps a better way to look at it), it is arguably another thing entirely. Of particular interest to us is the fact that the pricing and technical specs seem suited to the less-than-ideal telecoms environments of developing nations, where the user may not have a phone or consistent access to a computer, but where internet cafes may be prevalent. Don't take my word for it, consider the experience of one of America's pre-eminent internet commentators here (http://boingboing.net/2004_01_01_archive.html#107419881980805870).

The ability to have a US phone number with voicemail for $3.99 must have significant appeal for individuals in similar circumstances. Fully tapping this market may be somewhat challenging given low penetration rates for credit cards, though we believe voiceglo is investigating alternative payment mechanisms (perhaps a pre-paid mechanism using local partners in key markets is one option, or a PayPal-type solution). Regardless, given the company's projection of cash breakeven at 300,000 subs, glophone may need only gain a small fraction of the developing world's population as paying customers to become a highly profitable business. Keep in mind that Hotmail and Yahoo! Mail have a combined 37m users in the US alone.

Lastly we think the adoption of a browser-based interface must have implications far beyond glophone itself. It is interesting to note that at least four of the major global web-based businesses (eBay, Google, Yahoo! and KaZaA) are gradually straying into one anothers' turf in search of incremental revenues and service differentiation - Google into eBay's territory via sponsored search, Yahoo! into Google's territory via its own search/sponsored search technology, KaZaA into Yahoo!'s territory via a joint venture in dating/personals. For such businesses, seeking to provide a range of unique and essential services, we think the lure of incorporating voice as an incremental revenue stream must be increasing in the wake of what glophone has already achieved. Yahoo! is already partly there with its voice/video IM, but what of Google, as it faces confrontation in the search market from Yahoo! and Microsoft? What sort of boost would a low-priced, high-margin, browser-based voice product give its IPO valuation in the current climate?

On top of the various SIP service providers, Skype, enhanced IM, and whatever W.A.S.T.E./P2P darknets may morph into, the glophone is another piece of a picture which looks increasingly scary for the telcos. glophone may cause significant disruption of certain segments of the global market all on its own (international calling for a start), but if a global portal-based business takes this concept and runs with it, then the game has changed dramatically yet again, and not in the favor of incumbent telcos.

Gush - IM meets RSS, what's next?

Last week we held a conference call with the management of 2entwine (www.2entwine.com) about their very interesting and unique development known as "Gush." Gush combines Jabber instant messaging with RSS (Really Simple Syndication), the protocol which drives information exchange and distribution for weblogs, and which is also being used by Disney to push "on-demand" content to set-top boxes during late night hours. Using Gush, a blogger can incorporate Flash-based content and photos (http://2entwine.com/screenshots/) into his/her site, aggregate news from other blogs through a tabbed news reader, and also engage with others in instant messaging sessions. The choice of Jabber, an open source IM protocol, allows some interesting features such as split-chat, a unique feature where the text inputs of two participants in an IM session each appear side-by-side in separate columns, which seems to scan more easily. The application also fuses elements of RSS and IM together, in functions such as Gush Announcements, which allows the user to "blog" to defined members of his/her contact list simultaneously. Future features should include file-sharing capabilities, and management indicate strong interest in voice/video features, which should be technically straightforward given that Macromedia has incorporated these elements in its multimedia servers. Gush has seen 5,000 downloads in the past couple of weeks, and is currently free for non-commercial use.

As a business application, where Gush hopes to build its business model, we can envisage a number of applications in collaboration and information sharing/dissemanation. Choosing a scenario close to home, an analyst at Brokerage A has recently returned from a visit to Company X to see its new cutting edge product. Normally, he would sit down and begin the thankless task of churning out a standard, one dimensional report, possibly including some poor-quality bitmap images of the new product and some links to various parts of the corporate website. Employing Gush in such a setting would enable the analyst to publish his text in RSS, updated to all users linked into his RSS feed in real time, display high quality photos of Company X's new product taken with his own digital camera, engage in real time feedback with clients via IM, and link into product reviews, tech journals, or supplementary sources of information or expert opinion related to the technology. With the addition of video and voice, the analyst could post a video of the new product in action, or an interview with the CEO. We think the possibilities of such a product could revolutionize information distribution and the way in which consumers/producers of that information interact. For the securities analyst and his compliance department, this may give rise to a number of difficult issues, but overall we think the information flow could be richer, more open, more interactive and ultimately more democratic. We think these benefits map well across a number of industries, and may spell trouble for traditional information gatekeepers (be they securities firms or media conglomerates). At a more basic level, the implications of bringing voice/video into such an already-rich setting may be an additional negative for telcos.

Daiwa EuroTelcoblog No. 24, Tuesday, 24th Feb: Various topics around the unfolding VoIP story in Europe (original email blast 1:53 PM Tuesday, 24th February, 2004)

OFCOM numbering consultation

About 30 minutes ago UK super-regulator OFCOM just released a consultation on numbering issues for Voice over Broadband (VoB). We've only just skimmed it so far, but it includes a lengthy discussion of whether the allocation of geographic numbers to VoB service providers who are not traditional telephony providers will lead to consumer confusion. We expect that issues of consumer protection (is it a primary line replacement? is it an ancillary service? will consumers know the difference without a special numbering plan?) may arise consistently across Europe as services roll out. The document is here http://www.ofcom.org.uk/consultations/current/vobs/ and comes just ahead of the not-quite-entirely public meeting on VoB to be conducted by OFCOM in London tomorrow.

TeliaSonera lends a helping hand to analysts

Six minutes after the OFCOM message arrived, we received an invitation from TeliaSonera to a special meeting dedicated to understanding VoIP. The meeting is apparently being held in response to "great demand and interest we have seen lately from financial analysts to learn more about the technology behind Voice over IP and to understand TeliaSonera's strategy and business in this regard." If you have the kind of employer who will fund a trip to Stockholm for a one-hour meeting, here are the details. There is no sign of it being webcast, though if we hear of such a plan, we will advise.

Date: Friday, March 12, 2004

Time: 10.00

Venue: Sibeliussalen, Finlandshuset, Snickarbacken 4, Stockholm

Presenter: Mr Kennet Rådne, Senior Vice President,
Corporate Fixed Voice Products and Services

Skype launches conference calling feature

Yesterday Skype launched its first enhanced feature, a free conference calling function for up to five people, and an additional feature allowing up to 16 Skype callers to be put on hold simultaneously. Last week we had a meeting with Skype's CEO in which he outlined this and a number of other ongoing developments, some of which were featured in The Business last Sunday - a USB cordless phone device which will take the Skype user interface away from being a PC-to-PC product, as well as some other software-related developments which will increase the mobility factor of the service. We also believe that PSTN connectivity is not too far away in technical terms, though the regulatory issues in our view may be considerably more complex, even in the wake of the positive FCC ruling on the Pulver petition. However, as we tried to stress in our recent sector piece, we are not convinced that lack of PSTN connectivity is necessarily such a big deterrent to user uptake as some might think. Skype is generating 15 new user registrations every minute on average. The bigger it (and/or something like it) becomes, arguably the less the PSTN matters, at least to the individual user. Hold on to yer hats telcos, we're in for a rough ride.

Daiwa EuroTelcoblog No. 23, Friday 13th February 2004: Introducing Telio/Hello trouble - BAFO introduces voice IM-PSTN call forwarding/ruminations on the week (original email blast 12:02 PM Friday, 13th February, 2004)

Introducing Telio - It's about to get colder for Nordic incumbents

We recently held a conference call with the management of Telio (www.telio.no), a Norwegian start-up access-independent SIP service provider, established by former founders/management of Global IP Sound, well-known supplier of VoIP codecs to Skype, among others. Telio has also established a network of advisors that include some very well known VoIP and SIP experts, some of whom have featured in our previous coverage of the SIP arena over the past 14 months. Our conversation with Telio confirmed for us that the Nordic incumbents are likely to face a significant challenge from broadband telephony by mid-2004, before much of the rest of Europe feels the full brunt.

Key to the development of Telio's approach has been the Norwegian market's early separation of access and services under number portability, under which PSTN subscribers may maintain an access line (for ADSL) with no PSTN voice subscription. As this is one of the main emerging themes in the rest of Europe this year, we think the development of Telio may offer some insight into the implications of where the other markets may be moving over time. (Yesterday's presentation from BT highlighted that 59% of its consumer revenues are "contracted," i.e., locked in on a BT Together package, but we think the mounting momentum for unbundling of PSTN subscription across Europe may open the door for more creative pricing from broadband ISPs, and facilitate the proliferation of services like Telio.)

Telio's service has just connected its first few hundred commercial customers, out of the 5,000 it has pre-subscribed since mid-October during its beta trial. To put this in perspective, pre-subscription of 5,000, adjusted for the differential in market size, would be equivalent to Vonage having signed up 300,000 subscribers in its beta trial period. How much of this is attributable to the regulatory framework in Norway, and how much to some mysterious Norwegian geek factor, is open to question. Nevertheless, we think it is a dramatic start in a country with only 2m households, and implies that Telio has already claimed 1.7% of its current addressable market of c.300,000 broadband households). To date the company has spent virtually nothing on marketing, relying on word-of-mouth and some favorable press coverage for the interest generated. The company is currently selling subscriptions only over the web, averaging 50 to 100 new additions per day, though it has also had a number of enquiries from both specialist retailers and national general retailers related to the product. Longer term, Telio views its broader addressable market in Norway as equating to current ADSL coverage in Norway - i.e., 1.3m of the country's 1.7m access lines.

The service initially operates using a Sipura SPA-2000 at the customer premises, though Telio has a softphone for both PC and PDA under testing, is planning to introduce an IP videophone in Q2, and will also be selling WLAN phones like the the WiSIP device which we saw last autumn at the VON show in Boston. The current feature set to be launched includes 20 - 30 familiar features at no extra cost to the consumer signing up to the medium-usage plan (there is a small extra fee for users of the lower-usage plan), and we expect that more will be added as the service rolls out, including premium services. The current headcount within the company is approximately 10 FTEs, with a handful of consultant programmers. The customer support function has been outsourced for increased scalability. Management expect that they can scale to 50,000 customers with no significant increase in headcount. This partially relates to the company's in-house development of an autoprovisioning server for new customers, resulting in fewer technical support calls (and also saves the company in licensing fees to vendors). The outsourcing decision was taken to allow for overflow capability in the case of unforeseen demand levels, and also to provide a pan-Scandinavian CRM capability. This is relevant, as the company plans to expand to both the Swedish and Danish markets by Q2 of this year. To date, Telio has invested less than EUR750k in its network, which consists of one data center and two points of presence, and it has an SS7 interface lease with a telco partner with local interconnect across Norway.

Pricing is highly attractive relative to Telenor headline pricing in every category, and the monthly fee is structured so as to incentivize new subscribers to activate both ports on the ATA (i.e., take two phone numbers). All calls to regular fixed line phones are free, and this will also apply once the service is offered cross-border. Additionally, Telio will be offering a pan-Scandinavian telephone number to subscribers. We asked about the company's perception of the TeliaSonera broadband telephony product unveiled last week, and their take was that it was good (and free) publicity for the technology. However, as we pointed out last week, there are holes in the TeliaSonera marketing strategy, as well as the feature set of the product, which in our view makes it vulnerable to challenges from the likes of Telio.

Pricing comparison vs. Telenor (including VAT)

Connection fee
Telio NOK495
Telenor NOK990

Second IP line
Telio NOK495
Telenor ISDN NOK1489

Wireless IP phone
Telio NOK495
Telenor n.a.

Monthly fees - 1 line
Telio NOK159
Telenor NOK159

2 lines
Telio NOK239
Telenor ISDN rental NOK239

Call charges
Telio Free
Telenor Set-up NOK0.60, NOK0.21 peak, NOK0.14 off-peak

Telio Free up to 100 minutes per month, some countries excluded
Telenor Finland NOK0.89, Denmark/Sweden NOK0.53, UK NOK0.63

National cellular
Telio NOK 0.95 per minute
Telenor NOK0.60 set-up, NOK1.18 Telenor, NOK1.84 NetCom

International cellular
Telio 25% or greater discount over Telenor
Telenor Finland/Denmark NOK2.52, Sweden/UK/Switzerland NOK3.53

Hello trouble - BAFO introduces voice IM-PSTN call forwarding

Some of the lingering pessimism we have encountered among investors over the likely extent of displacement of PSTN revenues by low revenue/no revenue alternatives has been supported by a view that closed IP voice systems (such as voice IM, FWD, Skype) lack PSTN connectivity. We have maintained that, while this may be something of an inhibitor to outright PSTN line loss, in terms of calling behavior, it probably isn't that significant. Our research suggests that 90% of calling involves the caller's personal/family network, and therefore potential displacement should not be underestimated. Today we stumbled across a piece of information floating through the geek stratosphere, regarding a new product from privately held Taiwanese USB device maker BAFO Technologies. The Messenger Call Box (http://www.bafo.com/bafo/mcb/), to be released in Q2, claims to allow call forwarding of voice instant messaging to a designated phone number (including cellular), and also claims to interoperate with all major IM platforms (AIM, Yahoo, MSN, ICQ). Apparently the device monitors IM activity and responds to voice session invitations by mimicking the 'accept' response appropriate to the IM protocol being used, and then forwarding the session to a phone. There is scant information in the website, and we have contacted the company to try to learn more. We clearly have some big questions regarding the accounting mechanism for termination of a 'free' service on the PSTN (unless the company is effectively launching a subscription service instead of just a box - which is unclear), but at this point it appears to be a very interesting technical end-around solution to the closed/open debate, and may indicate more negative implications for the incumbents. We will follow up as appropriate.

Ruminations on the week

Out of the results we've covered or monitored this week, the underlying theme we extract is worsening visibility for incumbent players.

Tele2 and TeliaSonera missed numbers in their core markets and paid heavy prices (-9.5% and -7.3% respectively). Tele2 in particular painted a picture of competition in fixed and mobile in Sweden which was hardly comforting.

FT's numbers were solid enough, but Iliad, which reported 2003 revenues today, shows internet revenues up 112% YoY and telephony revenues up 116%. Unbundled DSL customers have risen from 16.6% of total in June to 33.6% in December (November's number was 31.8%), equating to around 163,000 subscribers. The company is targeting that more than 50% of subscribers will eventually be unbundled, i.e., we will see greater than 50% penetration of its subscriber base with the Freebox triple play product (including very aggressively priced VoIP).

Tiscali, in its results call yesterday, sounded very focused, suggesting disposals of non-core markets and greater concentration on markets where they have gained some footing (France, Benelux, UK, Italy, Germany). Tiscali is also upbeat on the margin enhancement and service differentiation possible under unbundling, and briefly discussed its own ideas for a triple play product over ULL. It's still early, but we think this may suggest a Freebox-type offering on a much broader scale in Europe.

Lastly, we are still feeling very impressed with BT CEO Ben Verwaayen's initiation yesterday of a discussion about behavioral and technology changes affecting the incumbents (see all of our research for the past 14 months for more details). It may be strange to feel as though we should applaud a telco CEO for acknowledging reality. Then again, this is a characteristic which has never been one of the stronger points of the industry. The fact that BT feels it necessary to educate the analyst community is worrying on the one hand, as we believe many of the drivers of change discussed yesterday have been on the radar for long enough. However, it is also positive to hear a European incumbent name-check Vonage and Skype, and even express appreciation for what they do. For anyone in the room who had not previously clocked these developments, BT's education exercise of yesterday was a good wake-up call, though a more sober assessment of telco risk arising in the analyst community as a result may not necessarily be supportive of incumbent share prices.