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

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

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

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

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

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

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

Resource update - Nokia paper on Mobile P2P

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

The paper is available at:

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

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

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

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

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

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

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

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

Resource update - UMA specs online

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Daiwa EuroTelcoblog No. 63: Friday 30th July, 2004 - Friday afternoon tidbits

Blip or new downdraft?

The Q2 reporting season for the Northern European incumbents has been a wild one so far. Following on from our sector pick Telenor's strong results last week, this week we got a very mixed bag from the next three to report (France Telecom, TeliaSonera, BT Group). The growing competitive tension in the Nordic and UK mobile markets were in evidence once again in the margin compression associated with just maintaining subscriber levels, let alone growing them. Carphone Warehouse management stated in its conference call that in the Dutch mobile market the company is seeing evidence of pricing aggression in the prepaid segment reminiscent of the 1999/2000 insanity, which probably bodes poorly for KPN results on 9th August. Fixed line volume decline moderated somewhat in Sweden versus Q1, but both France Telecom and BT Group exhibited signs of an acceleration of traffic decline significantly beyond our expectations and previous trends. Unbundled local loops in France now account for 15.6% of the total DSL line base, and have grown by over three percentage points each quarter (or 157%) since the start of the year. We believe the remainder of the reporting season may hold some other disappointing data points, with the central question being: is this a blip or the start of a new, more intense deflationary downdraft for the sector? We'll have to wait until Q3 for the answer, but the evidence at our fingertips suggests things may look rough once again. Take the announcements so far in the quarter by a couple of the key disruptors in Europe: Carphone Warehouse and Iliad, parent of French enfant terrible ISP Free.

Carphone Warehouse signed up 9,700 net new subs per week to its Talktalk carrier pre-select product during the quarter in the UK, has launched the product in France, and intends to roll it out in Spain, Switzerland and Germany by year-end. Based on previous statements from the company we expect these international Talktalk users will receive free on-net calls, regardless of where the call terminates. There is also an expanded European MVNO strategy in the works, as well as entry into the UK broadband market by year-end, and the discussion of VoIP on the call left us with the impression that it might be deployed opportunistically where there was a rationale for it. Compared to many players in Europe, we're talking about fairly small numbers here, but this is a company with 2m controlled wireless subscribers and 1300 stores across Europe. The UK stores reportedly account for half of the new subs signed up to Talktalk, and we wouldn't underestimate the potential of the company to cross-sell and bundle products in various markets across Europe longer term in a way that we haven't really seen from a newcomer before.

Iliad today announced ISP revenues up 84% YoY in the first half, and a 58% growth in its DSL subscriber base since the start of the year. More importantly, the proportion of unbundled subs expanded from 34% at the end of last year to 46%, giving it more control over product quality and better margins. Additionally, since mid-June the company has started pushing a fully unbundled product to customers, meaning that technically speaking, naked DSL has now come to France. Removing the incumbent from the customer relationship entirely is a key element in driving usage on its bundled IP phone available as part of the Freebox triple play product, which since March it gives to all DSL customers, not just unbundled lines. In other words, the 133k subscribers added in Q2 are all VoIP customers. One other thing we noted with interest was that Free's share of unbundled lines in France, though an impressive 48.6%, actually fell in the first half, as the other unbundled lines in the market grew by 208% in the first six months of the year. If the market continues at this pace, we may easily see one quarter of the market unbundled by year end, with a substantial number of VoIP users. No wonder France Telecom is serious about VoIP and TV over DSL.

More on Flarion

Last week we had a conference call with Flarion Technologies and wrote extensively about it here. A lot of the information in it probably sounded too good to be true for many readers, but this interesting product test review from Nextel's trial area in North Carolina seems to support the view that the product is robust and attractive. Similar to our conclusions last week, the reviewer nails it on the head in terms of broader market implications:

"It could replace your home broadband RoadRunner or DSL service and still be around the same price, with the added benefit of mobility....We predict that when Nextel rolls out this service on a national level, there will be many satellite broadband Internet providers, cell phone firms, and others who will lose customers immediately to this great new service."

We tend to think that this conclusion would hold true equally well in Europe, and if our speculation regarding T-Mobile and either the UK or Dutch markets turns out to be correct, then entrenched players in these broadband and mobile markets probably have trouble, and DT has a big opportunity. The review is here (http://www.rtptv.homestead.com/rtpnewsnextel.html) and the marketing site for the North Carolina trial is also interesting (http://www.nextelbroadband.com)

Analyst, blog thyself

Our leader piece in Daiwa's July Global Telecom Monthly (http://eurotelcoblog.blogspot.com/2004/07/special-excerpt-from-upcoming-daiwa.html) made a case for why telecom analysts may face superannuation at the hands of a new, more interactive and independent group of bloggers writing to a very high standard. I also argued that the brokers have an opportunity to harness RSS and other technologies in the pursuit of new distribution and marketing strategies. Lo and behold, last night I stumbled across (http://weblogs.jupiterresearch.com), which is the collected blogs of analysts at research consultancy Jupiter Research, some of which have been running since 2002. This makes for interesting reading, ranging from some opinionated and amusing material to a disturbingly broker-like review of the Time Warner Q2 results. It is even more interesting when we consider that this is a business where the revenue model is based largely on selling access to research products (and the seminars and conferences that are built on top of them), and we normally wouldn't expect to see such a company giving away intellectual property. However, the informality of the blogs lets readers get some insight into the personalities and views of the analysts, and the posts are peppered liberally with references and links to research products which must be purchased. I expect the revenue conversion factor may be fairly low, but this approach probably generates more interest, and is certainly friendlier, than a webpage displaying the message "access denied to non-registered users."

Daiwa EuroTelcoblog No. 62a - clarification on previous post

Niklas Zennstrom of Skype has asked me to clarify a point I made in my previous post, which I gladly do. The feature of Skype 1.0 which I refer to as "file sharing" is accurately termed "file transfer." The key distinction is that, unlike file sharing applications, Skype 1.0 users cannot browse directories of content available for download, nor indeed can they "download" at all. The exchange must be initiated by the user possessing the content, and as such it is technically no different from an email client (though I've never tried to email a 2GB file). My question over how this may be legally construed, or misconstrued, however, remains, as does my interest in the potential for this feature to find some sort of commercial application, as we saw in the Morpheus/Heart deal which we covered last week. In this ground-breaking deal, the dynamics of the P2P network model were harnessed with a DRM system which allows both the network and the users (who effectively syndicate the content) to generate revenue. Apologies for any misconceptions I may have fostered.

Daiwa EuroTelcoblog No. 62: Tuesday, 27th July, 2004 - Graduation day for Skype

It's official, only a couple of weeks shy of its first birthday, Skype has graduated out of its beta phase. Skype 1.0 launched today, and carries an amusing greeting message on its home page:

"Hello. We’re Skype and we’ve got something we want to share with you. We’ve got a simple bit of software we want to give you. It’ll let you make free phone calls to your friends all over the world. And we don’t want any money for it. It’s free. You could think of us as the big, free Internet telephony company. We prefer to think of ourselves as a big group hug, even a present. Yes... that’s it... we’re a present... but without the ribbon."

For those of us who enjoy monitoring the development of disruptive technologies, Skype has indeed been something of a present. Very shortly after the service launched last year, we were the first brokers in the world to give it coverage (as far as we know), and stated at the time that the arrival of Skype would probably turn out to have been the most significant story in the telecom sector in 2003. That's a view we stand by now, and the growth of the service from a standing start a year ago to 17.2m downloads and average concurrent users of 400k (in my experience), with no marketing, has been an inspiration to watch. Similarly, moving from a position in September 2003, when very few people had heard of the service, to spring 2004, when BT Group was publicly comparing its BT Communicator product to Skype as some sort of industry benchmark, gives a good indication of the shockwaves this application has sent through mainstream telecom. The formal announcement last week of telco partners has similarly been a confirmation of the fact that Skype can generate real revenues, not just for itself, but for others as well, and from a service which is nominally free with a headcount of around 50 people. Skype should be popping the champagne open tonight.

Skype 1.0 contains the very impressive SkypeOut PSTN termination feature, as expected, but also file sharing of files up to 2GB in size (roughly equivalent to 3 feature length movies). This is an interesting development, and I don't want to sound alarmist, but given the determination of the entertainment industry and some US senators to attack piracy by leaning on the enablers via legislation and litigation, we have to ask if Skype is crossing the line from the relatively politically neutral world of voice and into the world of pain which is the file sharing phenomenon. Skype doesn't bill itself as a file-sharing network, but in a climate where (as we've documented here recently) ISPs in Europe are being coerced to block P2P traffic or shut down the accounts of P2P users, this does raise some very uncomfortable questions over the legal position of anyone perceived as facilitating the illegal sharing of copyrighted material. Or, to the contrary, is this a value-added feature which might make Skype more attractive to "legitimate" distributors of licensed content as potential business partners (an idea we have also discussed here recently)? This is a tough issue to read, and we must work on digesting its implications, if any.

Related to today's launch, this article (http://www.pcpro.co.uk/news/news_story.php?id=61090) contains some interesting comments from Skype founder Niklas Zennstrom on the redundancy of the PBX in this new world, namely that a hardware solution can now be replaced by software. This, in fact, is precisely the opportunity being targeted by Peerio, which has received surprisingly little coverage in the mainstream and financial press since its splash at Supercomm last month (which I blogged here). There is also a reference to the avoidance of a white label approach (Skype is going for co-branding in its first venture with ISP PChome in Taiwan www.pchome.com.tw), which is the key strategy behind Voipster, which has also received surprisingly little mainstream coverage since its appearance. A Google search returns 637k citations for Skype, 465 for Voipster and only 324 for Peerio.

Daiwa EuroTelcoblog No. 61: Monday 26th July, 2004 - Flarion's European puzzle piece
 
On Friday afternoon our US and European analyst mega-teams had a one-hour conference call with Flarion Technologies, to discuss the company, its technology, and future prospects. Based on the discussion, we think that the coming 3 - 4 months will bring some key announcements, which should move Flarion's Flash-OFDM technology from its current position as an "in-trial" dark horse to a recognized commercial reality. Specifically, we think the near future holds key developments in the following areas:

Enhancements and new applications

Based on our discussion, we believe the company is close to unveiling enhancements to the technology which should treble throughput (currently 1.0 - 1.5Mbps downstream, burstable to 3.2Mbps, and 300 - 500kbps upstream, burstable to 900kbps). Such performance enhancements, in the European broadband context, would put Flarion on a level pegging with the best of the consumer DSL/cable modem products currently available. We think that with such plentiful bandwidth and latency of below 50 milliseconds (in practice it is actually around 20ms.), Flarion users should be able to run a number of bandwidth-intensive applications (IM, VoIP, conferencing, streaming media, etc.) simultaneously in a mobile environment with no appreciable difference in experience to that of a high-bandwidth fixed broadband connection.

To date, much of the coverage of the company has been from the carrier perspective, particularly the Nextel trial in North Carolina. However, the company is also seeing increased interest from municipal public safety authorities (some of which are also examining/deploying Wi-Fi based solutions) on the heels of its trial with Motorola in Washington D.C. We think this experience may well be repeated in Europe in future. Additionally, reference was made to the potential for Telstra's test deployment in rural Australia to explore the possibilities for broadband backhaul in the airborne environment, which opens up some interesting scenarios for in-flight communications and entertainment alternatives.

Contracts and handsets

Flarion seems to be pursuing a strategy of getting the technology embedded in networks first, then using the carriers' leverage with handset suppliers to produce units in volume. The company remarked that it believes all it needs is one commercial order for handset production to kick off, and that such an order may not be far off. The chipset, developed in cooperation with Texas Instruments and Philips, is ready for production, and there is a prototype handset, which can be viewed in the factsheet (http://www.flarion.com/products/overviews/Handset_Product_Overview.pdf) and also in high resolution here (http://www.flarion.com/news/library.asp). It is interesting to note that Motorola is the networking partner for Flarion's public safety trial in Washington D.C., particularly in light of Motorola's apparent leadership position in integration of other technologies into GSM handsets (BT's Bluephone, expected Wi-Fi integration), and also its long-standing relationship with Nextel.

Europe

We noted that of all the announced trials and partnerships running around the world (Nextel in the US, Vodafone in Japan, Telstra in Australia, and SK Telecom/KT Corp/Hanaro in Korea), Europe is notable in its absence from the list. This, too, should change by year end, we were told, though there was absolutely no indication of who or where. Obviously, Vodafone is the first European operator to publicly announce a trial of Flarion (albeit in the Japanese market), and as such it would be tempting to pick it as the most likely candidate. However, with its own 3G launch just going live, we are not convinced. T-Mobile's position in markets like the Netherlands and the UK is more marginal than Vodafone's in any European market, probably making Flarion a larger differentiation opportunity than a cannibalization risk in these markets. Additionally, we think that given Deutsche Telekom's views on seamlessness of services articulated at CeBIT in March, Flarion is probably a more reasonable strategic match than in the case of Vodafone (for example, would Vodafone see the same strategic imperative to adopt a technology in Europe which would allow it a position in the residential broadband market?). T-Mobile's Venture unit is also a Flarion shareholder, and it is pure speculation on our part, but we think it may be possible that the company has pre-emption rights on trials in the European markets, or at least in markets where T-Mobile operates.

It is difficult at this point to envisage what approach T-Mobile might take in a trial deployment. However, with an estimated cost of deployment of around EUR5 per PoP in an existing W-CDMA network, and somewhere around EUR7 per PoP in a greenfield environment, we think that coverage of a market like the UK could be delivered for something under EUR400m (Germany would probably come in under EUR600m). With the performance enhancements expected, T-Mobile could deliver a mobile product superior to anything in the UK market currently, as well as (if it so desired) an attractive alternative to existing residential broadband technologies, which would represent an incremental revenue opportunity, either through bundling with T-Mobile subscription, or via a separate marketing/branding scheme.

Daiwa EuroTelcoblog No. 60: Friday 23rd July, 2004 - Amsterdam, are you getting enough fiber in your diet?

Anyone who actually made it through our EuroTelcorama No. 5 back in January will recall that we spent a long time exploring the issue of municipal or regional government-funded network initiatives to bring cheaper, better services to consumers, frequently as part of a socioeconomic policy initiative. Our main interest was in the emerging tension between the agendas of telcos and governments, potentially leading to competition in some cases. Among the various examples we discussed were some proposals in the Netherlands, notably in Amsterdam, where substantially all households and businesses in the area (450,000 in all) would be supplied with a fiber connection on a city network funded entirely by local government. Yesterday in Amsterdam a meeting was held with prospective infrastructure vendors and service providers in the project. The background document was issued at the end of June, and gives a good orientation to what the project is trying to achieve (http://www.citynet.nl/upload/Selection%20Guidelines%20Operator%20Citynet%20Amsterdam%20V1-22.pdf). The presentation and Q&A slides from yesterday's meetings can be downloaded here (http://www.citynet.nl/upload/Q&A-22-07-2004.pdf) and provide some additional insight to the process and the expectations of the project organizers. Much of it is technical and legalistic, but the clear points of interest are:

• Phase one will involve at least 40,000 homes and 3,000 businesses, to be followed by another phase five to ten times larger.
• The drafters of the proposal envisage that "at least" three services (TV, telephony and internet) will be offered, and specific reference is made to "low-cost/flat fee services" such as "two-way high quality video communication."
• The organizers have avoided setting any specific benchmarks to define their use of the term "affordable," but the Q&A response states that, "Affordable means that a very large part of the citizens/households/small businesses can purchase services they require or desire, given the limitations of the 'share-of-wallet' they have available for this type of service." Judging from some of the current pricing in the Dutch market, "affordable," particularly in a government-funded network, may be quite attractive.

For example, KPN ISP Het Net is currently offering a 416/160kbps DSL product for EUR14.95, and 1Mbps products from both KPN and UPC's chello cable modem service cost EUR32.95. UPC's basic digital cable package costs EUR14.95 per month, and the UPC basic telephony package also costs EUR14.95. So, excluding any sort of bundling discounts, the typical Dutch consumer may be expecting to see an entry-level triple play product priced well below EUR60, and probably more towards the EUR45 level (as our contacts in the Dutch market have previously asserted). A Dutch reader subsequently emailed me to point out that UPC's digital cable package is only available on top of an analogue subscription, which costs the same amount. This would increase my triple play ARPU assumption to EUR75 at the top of the range, and EUR60 at the bottom. Certainly the value proposition underlying other similar projects, such as UTOPIA in the US, is for vastly higher access speeds and a triple play suite of services priced at a level comparable to existing services. The interesting thing to watch from the perspective of the incumbent analyst is how KPN deals with the situation, wherein it stands to be one of many service providers battling it out on someone else's network while potentially losing a substantial portion of its footprint. We are also very interested to see who turns up on the list of prospective service providers expected to be disclosed on 13th September. 

The Citynet website itself (www.citynet.nl) is worthy of some inspection, particularly if the reader has any knowledge of Dutch at all (though http://www.freetranslation.com/ can also be a great help). If my own barbaric Dutch skills are close to accurate, there is a news item in the site which seems to say that the 7,500 home fiber project in the community of Nuenen (part of the Kenniswijk project) has so far pre-registered 90% of the households in its area. This level of uptake in Amsterdam would imply something like 400,000 homes and businesses moving to fiber, presumably with a far wider choice of service providers than they enjoy currently.

Daiwa EuroTelcoblog No. 59: Thursday, 22nd July, 2004 - Taking a stab at VoIP's addressable market in Europe

Since we started looking at the impending rise of VoIP in late 2002, market awareness of the issue in Europe has grown from a whisper to a very loud cacophony, yet much of the market (ourselves included) has had great difficulty in quantifying exactly what's at stake. We have made a few attempts in past editions of EuroTelcorama, mostly on an individual country basis where we had reliable usage data, but a more comprehensive view still eludes us. With all the technological changes taking place, coming up with a credible number is a bit like the "how many angels can dance on the head of a pin?" argument. Theoretically, and very optimistically, we think the "addressable market" for VoIP as a "primary line" service in Europe is equivalent to the size of the broadband footprint itself, though in practice, this is probably unlikely to be the case for some time, for a number of reasons. We also have some serious doubts as to whether this is really an either/or scenario. In other words, we do not view the consumer VoIP phenomenon as a straightforward case of swapping one "primary line" service for another (PSTN for VoIP). Inevitably there is a need for the media and analysts to predict "winners and losers," but we think this oversimplifies what is probably really going on, at least among the early adopters - i.e., many consumers are eclectic, using IM (both text and voice/video based), Vonage/Telio-type commercial services, Skype, Stanaphone, glophone, PhoneGAIM, humble calling cards and a host of other services opportunistically as befits their needs and the specific environment they are in at the time.

Nevertheless, if we were to attempt to address the "how long is a piece of string?" question, to get a clearer picture, we would probably need some in-depth consumer survey across Europe, which, to our knowledge, hasn't been done yet. However, research firm Ipsos-Insight on Tuesday released a survey of American internet users which may allow us to make some speculative projections. Before we begin, we must state clearly that this is a "square peg, round hole" exercise to some extent, given the vast differences between the US and Europe (and within Europe itself) along cultural, economic and market structure lines. However, in the absence of any more granular data out of Europe, it's probably worth having a go.

Ipsos-Insight, in interviews with a panel of over 1,200 internet users in the US, determined that 19% of them would be classified as "likely" to switch to VoIP service in future. Users of DSL and dial-up services were keenest to move (22% and 20%, respectively), while people with phone bills of more than $40 per month were more than twice as likely as those with bills below $40 (32% vs. 14%). These facts are generally unsurprising, but there were some results which were more unexpected:

• When asked which type of service provider would be the best (the choices were telco, ISP, and cable company), fully 50% of respondents thought the telecoms players would do best. Cable companies scored worst (15% overall rating), though 33% of cable subscribers backed their MSO. This would seem to validate the view (apparently strongly espoused by BT Group, France Telecom, TeliaSonera, and apparently less so by many others in Europe) that there is a strategically compelling reason to move into consumer IP services sooner, rather than later.
  
• The other area of surprise was in the list of "must have" features for VoIP, as cited by those who said they were likely to switch. The most popular of these (caller ID, voicemail, power back-up, call waiting, call blocking) were as expected, but some of the more unique features of VoIP services, such as call forwarding, multiple phone lines and virtual phone numbers (in other words, the features which the industry pushes as key differentiators) scored below 30% (a full breakdown can be viewed here: http://www.ipsos-na.com/news/pdf/media/mr040721-1tb.pdf). Perhaps this merely reflects relatively poor consumer awareness of these features, thereby providing operators an opportunity to upsell customers after capturing them by delivering the basics. The alternative view would be that, while some in the industry are urging VoIP service providers to differentiate themselves along feature lines rather than price, this survey actually seems to indicate that consumers may be much more concerned with reliability of service, replication of standard PSTN features, and, or course, price. Viewed from this perspective, perhaps the incumbents are in a relatively stronger position, and certainly the US incumbents appear to be embracing the technology shift more enthusiastically than their European counterparts - so far.

Whatever the takeaways we can draw on consumer attitudes from one survey in isolation, the indication of interest is undeniably strong. How does this apply to Europe? Let's look at a few recent internet usage stats, onto which we can attempt to graft the assumptions produced by the Ipsos-Insight study. According to Nielsen//NetRatings, which tracks internet usage in seven of the nine largest European markets (excluding Italy and Belgium), the "active digital media universe" for these markets in June was 86m users (home panels only). This breaks down by market as:

France         14,348,243

Germany     26,775,877

Netherlands  7,785,983

Spain             8,436,889

Sweden         4,391,951 

Switzerland  3,215,203

UK               21,082,432 

Total            86,036,578 

Doing the numbers

Applying the Ipsos-Insight result of 19% overall intention to switch, this points to a figure of 16.3m for the seven markets covered, and probably something like 25m for Western Europe as a whole. This is a figure very close to the estimate of total household broadband connections in Western Europe at the end of Q1 (just over 26m on our reckoning).

Another approach would be to apply the Ipsos-Insight figure for interest level among DSL users (22%), and apply it to our estimates for DSL users in all of Western Europe at the end of Q1 (19.3m). This gives us around 4.3m, to which we can add the 15% interest level found among cable modem users (6.8m) for a total of 5.3m potential residential VoIP users in Western Europe, or c.3.5% of total households. Factoring in further penetration growth in Q2 probably safely takes this number over the 6m mark at present.

What this doesn't capture at all is the likely interest among narrowband users. Anecdotally, VoIP service providers we have spoken to in the US and Europe (of both the access-independent and cable varieties) have indicated that in their experience, narrowband customer awareness of VoIP as an application enabled by broadband can act to accelerate the decision to migrate to broadband.

So, at the bullish end of the range, we have a potential migration of at least 25m in Western Europe over time, and at the more conservative, shorter-term end we may have something like 6m candidates at present who are actually able to do something about it. EU market stats released annually have shown residential PSTN ARPU (access and switched minutes) in the EU-15 stable at just under EUR30 per month (ex.VAT) over the past two years. Setting aside the fact that roughly 40% of this expenditure will probably be related to access (which is a problematic issue for VoIP players in most markets), we determine that if the 6m near-term potential converts cited above migrated all their voice ARPU to a VoIP platform, the revenue opportunity is probably on the order of EUR1bn annually. Adding back the access portion would take the opprtunity nearer to EUR2bn, or nearly 1% of the total estimated 2003 market value of telecom services in the EU-15 (comprising telephony, internet, mobile, CATV, and switched data/leased lines). Mapping these same assumptions across 25m migrating subs gives us a voice opportunity of c.EUR5bn and total revenue opportunity close to EUR9bn. That's more like 2% and 4% of the total market value, respectively.

One final caveat here is that, at least among the access-independent service providers we've spoken with, our experience is that the customer profile attracted to the VoIP proposition tends to generate higher-than-average ARPUs, and the Ipsos-Insight survey shows a significantly higher level of interest from those spending more than $40 per month on phone bills. In other words, our conservative EUR1bn revenue opportunity estimate may indeed be too low. We do not regard this exercise as anything approaching definitive, and the larger nagging question we continue to confront is how much of the revenue opportunity (whatever it is) is revenue transfer, how much is revenue defense, and how much simply vaporizes? As we have written and presented on numerous occasions, we think there is a better than even chance that a lot of this value is transferred to global internet brands as they battle it out for world domination. 

Daiwa EuroTelcoblog No. 58: Tuesday, 20th July, 2004 - More on telco positioning in content distribution

Recent posts on this blog have tracked some difficult issues related to the position of telcos in the content value chain: developments such as the litigation squeeze being placed on Tiscali in the Belgian courts as an "enabler" of piracy, and also on issues of technology, competitive environment, company culture and consumer behavior, which telcos may encounter in delivering video services on their broadband platforms. This rapidly-evolving issue has seen another couple of interesting twists in the past few days, which may have some interesting implications for most of the stakeholders in this market - record labels, P2P networks, commercial music download services and telcos/ISPs.

French direct action

Last Thursday (15th July), an industry roundtable meeting was held at the behest of three French cabinet ministers, in which the various parties adopted the recommendations of Canadian anti-piracy watchdog ITIC/DIC for taking action against piracy over P2P networks(http://www.itic.ca/DIC/News/2004/07/15/Fr_Govt_adopted_DIC_recommendations.html). What resulted was reportedly an agreement in principle for telcos/ISPs to shut down the accounts of users found to be engaged in piracy, simply on the basis of a court order produced in response to user data supplied by the labels. This should speed action against individuals to an almost immediate response, while avoiding lengthy court cases and heavy fines, which have proved controversial and unpopular measures in previous actions. No doubt, this is a more moderate approach than that seen previously from the music industry, but it does put the telcos/ISPs in a strange position. It is a well-documented fact that P2P traffic accounts for more than 80% of total traffic on broadband ISPs, and depriving users of access to the "fat pipe" should do little to aid the growth of the broadband market in the short term. It also may alienate a potential target audience for migration to legitimate paid services, which have produced a staggering amount of positive newsflow recently, and which potentially offer the telcos/ISPs some incremental revenue opportunities through partnership. The gloss put on this development portrays the telcos/ISPs as willing and happy participants, but we also have to recognize that this may be a damage-limitation exercise from their perspective, if they sense that some European version of the approach used in the American INDUCE Act (as is apparent in the Tiscali case) is on the horizon.


A big week for the "nice guys"

Churning off broadband customers is clearly a place where the telcos/ISPs do not want to be, especially in light of the landmarks passed by the legitimate commercial download services over the past weeks:

Apple's iTunes last week reported it had broken through the 100m download mark. This may be small beer next to the estimated 2.6bn files exchanged each month on the P2P platforms, but if we accept that the service really exists to drive hardware sales, then this is clearly a very significant achievement (in spite of concerns that vulnerabilities in Apple's DRM may undermine it in the longer run [http://http://www.itic.ca/DIC/News/2004/07/13/New_danger_for_Apple_music_files.html]).
OD2 (now part of Loudeye) last week reported six new white label partnerships, and pointed to soaring volumes on its partner networks, up 20 - 30% each month in the first half of 2004. Interestingly, the increase in competition in the market seems to be spurring volume growth across the board, as the launches of Napster and iTunes in the European markets were accompanied by week-on-week volume increases on OD2 partner sites of 22% and 28% respectively in the weeks in which they launched.

Napster parent Roxio yesterday announced six more high-profile additions to its university affiliate program in the US (the first was the University of Rochester in February). For those unfamiliar with this program, it is an alternative strategy for universities in the US to try to control bandwidth consumption on their campus LANs and stave off lawsuits as enablers of piracy, by partnering with Napster to provide a sanctioned P2P platform tailored specifically to the individual institution.

Perhaps the message from all of this is that the content providers have found a sweet spot in the market, supported mutually by broadband growth, consumer awareness, fear of litigation, and pricing. Indeed, 99 cents per track equates in some cases to less than $8 per album, which is very competitive versus CD pricing, and the OD2 service known as SonicSelector allows streaming (not burning) of tracks for 1p per song - a reasonable "try-before-you-buy" strategy. OD2 reports that one-quarter of downloads sold on its platforms are streamed in advance of purchase. For the telcos/ISPs, perhaps the best course is to strike a regulatory/litigation trade: actively shut down the file sharers, push partnerships with the legitimate partners in the space, and hope for the best.


P2P turning the tables?

However, things don't stay static in this market for very long, and yesterday saw the announcement of an interesting agreement between Streamcast Networks, parent company of P2P platform Morpheus, and '70's rock veterans Heart, who have released another comeback album and are embarking on a large-scale summer tour. Under the agreement, Morpheus users will be able to purchase the 16 tracks from the new album outright, or preview each track in its entirety three times before purchasing. Morpheus is giving the rights holders to the music a 50% cut of revenues, and interestingly, is also sharing revenue with users who share the tracks with others. Each Morpheus user who purchases tracks has the possibility of generating a commission of up to 20% for direct sales of tracks, with the commission declining thereafter by degree of separation (i.e., friend-of-a-friend transactions). This deal is fascinating, as it seems to harness the social networking aspect of file-sharing with a financial incentive to the end-user. It also provides a P2P "renegade" with a legitimate revenue stream sanctioned by the rights owners themselves. Lastly, for a band on an independent label, unsure of its prospects to get radio airplay in support of its tour, at the very least the preview facility offered by Microsoft's DRM, and the viral nature of the P2P network, may give it some added exposure it might otherwise not have had. Plus the band nominally gets to stand up as a party sympathetic to file sharers. While it is very difficult at this point to see the major labels getting into bed with their P2P nemeses in similar commercial arrangements any time soon, this does provide an intriguing model for harnessing the huge scale of the P2P networks to make money (the Morpheus application alone has been downloaded 125m times), which is what many in the P2P world have been advocating for some time now.

The implications of this deal may again pose hard questions for the owners of the pipe/customer. If the massive P2P networks are indeed embarking on a drive for "legitimacy," whether motivated by litigation or envy at the success of iTunes, Napster and OD2, then we are likely to see some other very innovative deals along the lines of Morpheus/Heart's agreement. Each step along this road may add further credence to the idea that the P2P platforms could become a money-spinner for a variety of parties, including the telcos/ISPs (either as an outright partner in the service, or through a sort of premium "turbocharged bandwidth on demand" facility to the platform itself). In the meantime, at least in Europe, what we see are early signs that the telcos/ISPs may end up on the wrong side of such a potential opportunity in the near term, if they are either themselves sued (as in Belgium) or coerced into churning off broadband customers (as in France) due to association with enabling piracy. This is a difficult issue, and one we will be tracking closely as it evolves.

Daiwa EuroTelcoblog No. 57: Friday, 16th July, 2004 - Some very different angles on on-demand TV
 
A couple of weeks back I wrote about some takeaways from the Profiting from On Demand TV event sponsored by Informa Media. Basically, my distillation of what I saw and heard led me to a pretty pessimistic conclusion over the likely success of the incumbent carriers in cracking this market. Since then we've had some new data released about shifts in file sharing patterns, and a kind reader has also alerted me to some new developments which potentially make the whole issue of content distribution somewhat more exciting and problematic for everyone. The following tries to weave these two developments into some sort of alternative view of the on-demand TV phenomenon.

Recent data

Firstly, over the past week, two reports on file sharing have been published (by the Motion Picture Association of America and the OECD), and two producers of P2P traffic policy solutions (CacheLogic and BayTSP) also produced some interesting stats.

• CacheLogic found that as recently as June, global P2P platforms averaged 8m concurrent users at any given time (actually the press release says 10m, but this is a peak usage figure observed over six months). These 8 - 10m concurrent users typically shared a staggering 10 petabytes (that's 10m gigabytes) of data.
• The MPAA estimated that 2.6bn files are copied each month on P2P platforms globally.
• The OECD, basing its analysis on data from BigChampagne, estimated nearly 10m concurrent users globally in April 2004, up from just over 7m in April 2003. It also provided a breakdown of estimated users by OECD member state. Europe claimed seven of the top ten slots, with Germany at number two after the US, accounting for 10.2% of all global P2P users.
• The OECD notes that the fastest growth in share of P2P usage has come from France, Germany, Italy and Japan.
• In terms of penetration of total population, in France and Germany (joint third place after Canada and the US) the OECD estimates that 0.6% of the total population engages in file sharing. Canada is double that level, but adjusted for broadband penetration levels, some of the European penetration figures are actually higher than that in Canada.
• Interestingly, while the OECD has found a strong negative correlation between income/education levels and downloading behavior in the US, in France this relationship does not appear to exist. The OECD produced data from ART which appears to show a roughly equal tendency to download irrespective of income, and a greater tendency based on education level. The reading is that, at least in France, file sharing is on the way to becoming a more mainstream and widespread phenomenon over time.

Running beneath all this data is an apparent shift in both P2P platform preference and the content being shared. CacheLogic pointed out that reports of declining file sharing activity are based on faulty measurement, as the industry groups such as the RIAA tend to track KaZaA and other Fast Track-based networks, which have gone ex-growth. If the net is widened to include other platforms, such as eDonkey and Bit Torrent, usage is growing and becoming more bandwidth intensive. The OECD data backs up the claim that there has been a platform shift, as it shows users of Fast Track platforms remaining fairly stable at around 4m since late 2002, while the overall number of P2P users nearly doubled.

What is promoting the shift? Video, apparently, particularly in the case of Europe. The OECD found that in Germany, Italy, Belgium and France, video accounted for c.25 - 40% of all files shared on KaZaA, though KaZaA is generally acknowledged as being inferior for swapping large files like video in comparison to Bit Torrent and eDonkey, the two platforms which have seen the largest growth. Bit Torrent in particular has been huge according to CacheLogic, which estimates that it now accounts for 53% of all P2P traffic globally, up from 26% in January 2004. The MPAA study asserts that globally, 24% of internet users have downloaded a movie at least once, with Korea leading the pack at 58%. However, France (27%), the UK (20%), Italy (20%), and Germany (19%) are all in line with the global average and the proportion in the US. The survey also found that 20% of those with no file sharing experience intended to start at some point in the future.

Implications
 
Some of this data is bound to be a bit skewed, because Bit Torrent is often used also for distribution of large software files, which may suggest that some items are being misclassified as movies. However, there are still some fairly serious implications for both the carriers and anyone involved in content ownership/distribution:

• For the carriers, the shift from music files (average file size 4MB) to video files (ranging from 100MB to upwards of 600MB in the case of a full-length film) implies a lot of network capacity is being soaked up in the process. CacheLogic's presentation http://www.cachelogic.com/press/CacheLogic_Press_and_Analyst_Presentation_July2004.pdf has some interesting graphics, and makes the point that in one extreme case, it determined that 30% of the total P2P traffic on the network of one large ISP was generated by the availability of a single 600MB file. With P2P traffic already estimated by some to account for >80% of ISP traffic, this dramatic uplift in bandwidth intensity is a pretty alarming prospect. CacheLogic's own estimate of transit costs to ISPs in Western Europe associated with P2P for this year is EUR100m.
• For the content owners and distributors, the piracy issue is again intensified, but perhaps with more impact in the film industry as opposed to music, due to its more capital-intensive nature. This, in turn, may bring in more litigants via suits such as the Belgian case against Tiscali as an "enabler."
• For carriers looking to build a business case for TV/VOD as an application on their DSL platforms, we have to question what sort of dilution impact they may see from an embedded and expanding user base more intensively sharing video content.
  

Torrentocracy

Against the background of all these data points, a kind reader this week alerted me to the existence of something very interesting called Torrentocracy. I spoke briefly with the developer of this application, which was just released last month. He was very quick to point out that he is keen to avoid any identification of his innovation with illegal file sharing, and there is a very clear policy statement on the website:

"Torrentocracy is not about railing against or stealing from big media. Instead it is about creating this all access network from the bottom up in the best interest of consumers. Just imagine how dull the internet would be if all the content was controlled and doled out by just a few large corporations. Now realize that this is how TV has always been. If the revolution will not be televised, it will instead be brought to you via torrentocracy."

My inclusion of it in this piece is purely my own decision as an illustration of some of the innovations coming out of the open source developer community which challenge old assumptions about content creation and distribution. Depending on the uses to which these innovations are put by the individual end user, the picture painted in the first part of this piece could grow more complicated.

Torrentocracy (http://torrentocracy.com/index.shtml) is a fusion of Bit Torrent and RSS, and there are others such as Buttress and Azureas which are perhaps better known (Azureas claims 10m downloads to date), but where Torrentocracy has moved forward is in the integration of this with the television. This was achieved via integration with the MythTV (www.mythtv.org) open source PVR system, a phenomenon we have been looking at from time to time over the past six months. Torrentocracy, however, seems to revolutionize the promise of such a system, by allowing syndication of content between large numbers of individuals using RSS feeds with torrent files embedded. Theoretically, we are looking at a new concept distribution platform for a variety of audio and video content, including entirely non-corporate, independently produced material. Obviously, being open source, such a system could be put to other uses not envisaged or sanctioned by the developer. My main interest is in the fact that Torrentocracy and any subsequent similar developments are clearly an interesting step in decentralizing control of content creation and flow from the global media conglomerates, and may prove an additional source of pressure on commercial on-demand offerings, whether from the telcos or the established players in cable/satellite.

Is the industry watching the right channels?

One potential inhibitor of such a platform may be the diffusion of Linux operating systems. Statistics based on system registrations at Linux Counter (http://counter.li.org/reports/short.php) rather unhelpfully estimate somewhere between 2.9m and 72m users of Linux worldwide, so there is a wide margin of error here. It is interesting to note, in passing, that the country breakdowns of Linux registrations in the site are heavily weighted towards Europe. However, at this point, the main takeaway in my mind is that the current speculation about winners and losers (ADSL, cable, satellite) in the on-demand video content world may get considerably more complicated as a result of this sort of innovation being driven by independent developers working in relative obscurity.