Oddly Enough, Access Is Where QoS Really Helps

Brough Turner, NMS Communications CTO, argues that quality of service measures in the Internet backbone provide negligible benefits. It's in the access links where QoS really can make a difference, and that's the area where at&t's merger approval agreement with BellSouth prohibits it from doing so. Oddly enough, the inability to "discriminate" between packets prevents users from experience improvements they might like to have.

Once packets get beyond the access network, every link in the Internet is carrying multiplexed traffic that is statistically relatively predictable, Turner argues. "Traffic volumes vary by time of day, but these links don't saturate, except as a result of poor engineering or forecasting on the part of the ISP or failures in other parts of the network causing rerouted traffic," says Turner. "Either case generates a rapid response from any ISP that expects to remain in business."

"In short, except at the edges of the access network, Internet links may be heavily loaded but are not saturated," says Turner. "Best effort is good enough even for low latency applications like voice telephony" in the backbone, as a result. "Except during major failures, the effect of QoS in the Internet backbone is negligible."

That isn't the case for access links, Turner argues. "There is one place in the public Internet where limited, highly specific QoS measures make sense and are being deployed," and that is "at the consumer end of an asymmetric broadband access link."
Specifically, it is the upstream links that can saturate. The other issue is that it frequently is not possible to buy additional capacity in the upstream direction, at any price. And that makes routing policies very valuable.

His full comments can be viewed at http://blogs.nmss.com/communications/.

Incentives Still Remain the Issue

Nobody yet knows how much bandwidth typical consumer users will want, and be willing to pay for, in the future. Demand may prove less robust than many now believe. But if customers really want, and will pay for, 50 Mbps or 100 Mpbs access pipes, then a fiber direct to residence network is about the only thing that really works, if demand is strong enough that little sharing is possible.

So the problem is how to get such networks built, at a time when capital providers are skeptical, to say the least, about the wisdom of building such networks.

Perhaps we should simply acknowledge that some partisans in communications policy debates seem to prefer government solutions that remove profit motives entirely from broadband infrastructure efforts. There is a logic there. Some sorts of infrastructure might indeed be natural monopolies that simply can't be created by the private market. And if that is the case we are wasting our time thinking such sorts of networks can be created any way but sanctioned franchises and monopolies.

And that remains one of the issues at the heart of the network neutrality debate. To the extent that we honestly expect private capital to flow into infrastructure, we have to honestly confront the issue of whether profits can be made, and how they can be made, by entities trying to supply such infrastructure, especially when we haven't tackled the issue of how different regulatory regimes can be reconciled. Why, in the same market, do we regulate providers of similar services using entirely distinct frameworks? It's a rhetorical question, of course.

Some contestants come out of a broadcast mass media model with greater degrees of content freedom, while others come out of a common carrier model with drastically less freedom. But by universal agreement, all the services provided by all of these contestants will be the same. Because of the immense commercial interests in play, nothing signficant is going to be done about this growing inconsistency any time soon.

Nor is it likely private communications firms will simply be nationalized and operate as regulated utilities. That being the case, the issue of incentives will remain key if we are to have any hope at all at mass and robust broadband availability.

ILECs will Lose 30 Percent of Households by 2010

By 2010, 30 percent of households in the United States will completely cut their service with their local phone company, predict analysts at The Yankee Group. These households will upgrade to broadband and choose VoIP for their home phone service or become wireless-only households. But there are countervailing pressures.

Some 48 percent of households with both a wireless and landline phone say their wireless phone will never replace their landline phone. The main barriers to wireless-only service include reliability and quality. Some 19 percent of wireless users cited quality and reliability as primary reasons for retaining the landline phone. Twenty-two percent of wireless users cited indoor wireless coverage and 28 percent cited battery life as reasons not to cut the cord. Wireless quality and reliability will continue to improve, and will weaken as reasons to keep the landline phone.

About 37 percent of wireless users say Internet access requirements are a primary reason for retaining the landline phone. About 45 percent of households have DSL or dialup, which both require a landline connection. With the exception of Qwest and a few others who offer it as a retention strategy, local phone providers are still not offering consumers stand-alone DSL service. Over the next few years, Yankee Group researchers expect local phone providers to offer DSL without local phone service ("naked DSL"), reducing the need to keep a POTS line in service.

About 37 percent of wireless users cited emergency calling as a primary reason for retaining the landline phone. Some 26 percent of wireless users cite a unified family phone number as a primary reason for keeping the landline phone. A single phone number that provides a family identity, that can be given as the main contact number, is valued by this consumer segment.

Consumer Directory Services: A Work in Progress

The majority of consumers still use a traditional paper address book to keep the names and numbers of their friends and families but the mobile phone and instant messaging services are increasingly important, and points out the way service providers or portals can use directory services--especially enhanced with availability features--to "glue" customers to their offerings. Some 25 percent of households recently interviewed by The Yankee Group said that they always or sometimes keep contacts on a web-based e-mail account. About 32 percent of users say the mobile phone is the device where directory information is kept.

Directionally Helpful Trend

If one is a would-be provider of IP video content provider in the European market, the trend is helpful, if suggestive of the business challenges. As one might expect, few users say they have paid for downloaded or streamed video content. But the percentage of users who say they have done it, or would do so, seems to be growing. If we assume that the primary audience to this point has been younger demographics rather than mainstream video consumers, that's helpful.

How BT Got Its Voice Revenues Down

A challenge every legacy telco faces is transforming its revenues away from voice. One advantage BT has is that it is a global carrier, able to build a wholesale business, serve transnational enterprises, small and medium business as well as consumer customers. Increasing its efforts in all sorts of new and data-related services has allowed BT to reduce its reliance on voice revenues far below levels typical of other "telephone" companies. Smaller telcos will have a tough time replicating the global enterprise and wholesale parts of BT's strategy.

Email, Web, IM Top Enterprise Mobility Drivers

Email, Web and instant messaging access are the top three drivers for enterprises adding more mobility support for their workforces. Smart phones are the new black, it seems.

Build Strategy Makes a Big Difference

Verizon and at&t are fighting local franchising rules of various sorts that the carriers say are deterrents to building new broadband networks. Without fanfare, other providers such as RCN build Triple Play networks without serving the whole community, and find the going tough even without mandatory communitywide buildout requirements. The problem? The economics of competitive local networks are tough, since no single provider can reasonably expect to get much more than 20 percent of potential customers in a market with four providers, for example.

Another way of putting matters is that 80 percent of the local ports have no customers on them, and no revenue. That's not a prospect likely to make capital providers very comfortable. The fact is that some parts of every community, and some neighborhoods within every community, are more profitable than others, as indicated by Solon Management Consulting. Building in the most-profitable neighborhoods first, to get the revenue flowing, before tackling the more problematic areas is simply a business reality.

Arbitrage Won't Drive VoIP Forever

To this point, global VoIP usage has been driven by price arbitrage. But global calling rates are coming down, so that form of arbitrage will prove less interesting to end users at some point. At the same time, wireless usage continues to climb. And while there might be some room for price arbitrage in the wireless domain, it will be found precisely where arbitrage as proven most significant in wireline calling: international termination.

That probably doesn't mean price arbitrage forfeits its key role in user adoption any time soon, simply because there are other cost elements to arbitrage. The U.S. cable operators, in fact, have extended price arbitrage into the local calling realm, offering VoIP-powered services that simply mimic the PSTN, but arbitrage the recurring access revenue stream, not the minutes. Inevitably, though, at some point, VoIP simply won't be about price arbitrage any longer, because there won't be much left to arbitrage. Users will have found they are paying for services and features way beyond the ability to place or receive a call, and service and app providers will have adjusted accordingly. A "soft landing," you might say.

Piracy Part of the Business Model?

Up to this point, younger Internet users have been the most active abusers of video content rights on the Web. Much content now is pirated, according to The Yankee Group. We doubt this will continue to be so much the case as downloaded video becomes mainstream and much of the demand shifs to high definition TV fare where image quality and consistency will really be important.

There also is some precedent in the video world for a small amount of piracy to be a good thing for the overall value chain and growth of a new business. In its earlier days, the U.S. cable TV industry used filters of several types to control viewing of premium services such as Home Box Office. So piracy was a matter of securing the proper filter and inserting it between the house drop cable and the distribution cable's "tap." In this scenario, manual audits were the only way to determine whether an installed filter was legal or not. And since assigning technicians to patrol the entire plant looking at "traps" costs money, there is a cost-benefit issue.

A service provider wants to minimize theft of service, but not completely, as the cost to control then outweighs the "losses" from theft. Also, there is a subtle way that some amount of piracy actually creates more revenue, at least for the service provider. The example is subscribers who pay for basic cable access but then are able to pirate HBO. In that scenario, a cable operator might actually get a recurring revenue stream it otherwise wouldn't have gotten, while the economic loss is borne by HBO, which isn't paid. With changed technology, this particular attack is seen rarely, if ever. Also, access to HBO no longer drives cable, satellite or telco TV penetration.

The point is that some amount of piracy must be tolerated because complete eradication costs too much. And there might even be some cases in which a limited amount of piracy actually can lead to a bigger revenue stream for legal uses. Earlier in its development, productivity software suppliers realized that some amount of piracy actually would increase the base for legal sales, because users grew accustomed to the use of particular products and then would buy legal copies.

As the network-delivered video business develops, particularly as an application or service used by large numbers of people who don't want to hassle with technical details, and just want to watch content on their HDTV and other screens, we likely will see a significant decrease in piracy and an equally significant increase in legal downloads. We might even find, as we have found before, that some amount of piracy can actually stimulate the legitimate part of the business.

Both Substitution and Augmentation

The common sense expectation we all seem to have is that VoIP ultimately replaces POTS, and that's correct in a technological sense. Their respective business futures might be less certain. We mean "business" here in the sense of revenues that can be generated from services and features associated with POTS, even if the platform changes. Those of you who lived through the analog to digital switch transformation understand this. Revenues sometimes grow when a new platform displaces the old, because there are new things to sell, and costs sometimes drop at the same time, allowing a retail price to reap more margin, even on the legacy products.

And one of the things about POTS is that there are latent values beyond the switch and transport technology that might be the real reasons customers buy POTS service. If you think in terms of "user communities," the PSTN outstrips nearly anything else we've built so far, with the exception of wireless. But if wireless is seen as untethered access to the PSTN, then the PSTN community is where one wants to be.

In other words, the PSTN directory is far more developed than any directory you or I have built ourselves. A "buddy" list can be built for the small number of people you communicate with regularly. Beyond that, the PSTN still rules. That's valuable. One might argue, at least at this point, that POTS is more reliable, in just about every sense, compared to just about any VoIP alternative. That has value for end users, and might continue to, even when the infrastructure changes.

Also, the business value of the PSTN, which is voice-oriented, arguably is enhanced when integrated with instant messaging, text messaging, conferencing, Web access and other features. All of that might help explain why just half (49 percent) of residential customers who adopt VoIP say they discontinued a traditional phone service when they got their VoIP services, according to a recent survey by In-Stat. Put another way, VoIP displaces half of existing POTS line purchases, but also augments POTS half the time.

Also, in addition to "cord cutters" who rely exclusively on wireless for their personal voice communications, In-Stat finds that nearly 12 percent of respondents say their only VoIP service is based on the use of soft clients. That's further evidence of the growing importance of IM-based voice, presumably including "call out to the PSTN" capabilities.

And blurring the distinction between "business" and "consumer" uses, half of the VoIP users say they use their residential VoIP service either in part or in whole for business purposes. The trend is especially pronounced among VoIPers who are softphone-only users. More than 40 percent of such people use VoIP for business applications.

There are lots of suggestive niches here. Even in the consumer space, it appears there are augmenters, displacers, "no phone" users, "no phone" business users, IMers and maybe people who don't like "gizmos" of various sorts (probably the same people who dislike cable decoders and other CPE).

Metro Ethernet Getting to be a Bigger Deal

As wider adoption of IP phone systems spurs buying of SIP trunks, so IP itself drives demand for Ethernet access. The Yankee Group sees spending by enterprises in the Asia-Pacific markets doubling in four years, for example. "Year over year we see metro Ethernet becoming a greater percentage of our sales," says David Rusin, American Fiber Systems CEO.

The demand is "steady" at about 40 percent growth this year, Rusin says. And Rusin is very clear about how this market needs to be attacked. "After 10 years and billions of dollars of wasted capital we now know you must have your own network."

Needless to say, Rusin isn't a big fan of mandated wholesale access to high-bandwidth facilities. In the U.S. market, mandatory unbundled network element access should go away, maybe over a five-year period. If all competitors understand that they must have their own facilities to compete in the access market, that is what they will do, or they will do something else. "Then capital will come back in to the market," Rusin says. "The incentives need to be there."

In a market as competitive as the metro Ethernet space, how does Rusin answer the objection that there already is too much competition? Simple. "We don't build where there already is capacity," he says. In other words, if there is any existing fiber or capacity in place, AFS simply leases the capacity. The only time it will swing an optical lateral is when there is no other alternative. "If you aren't operating off your own network, IRU or capacity, I don't see how in the long run that's a sustainable business," he simply says. Lots of other providers would say the same thing.

Mobility is Key for Business Unified Communications

There's a really simple reason why mobile devices are destined to play a key, perhaps the key role, as unified communications develops. At least 41 percent of the workforce already is mobile, and just about every employee is a mobile user in their personal roles. So to the extent unified communications almost always the ability to send and receive communications on mobile and desktop devices, mobility is a virtual requirement, even for workers who are not "mobile" in the normal course of their work day.

"There are lots of ways people communicate now," notes Sphere Communications SVP Todd Landry. "What does it mean to unify all that?" Some might say it means different media types can be more tightly integrated with other forms, Landry says. "At the lowest level, you want multiple forms of communications unified, plus mobile and desktop integration. "At another level, it might mean availability of presence state and text messaging, voice and video, so calls are handled differently depending on what you are doing," Landry says. "At a still higher level, it is communications integrated with business processes."

"Traversing between work and personal roles, your presence and control might move between domains," he says. "So the mobile phone is probably the most important device to support." First of all it is ubiquitous. And it will become a more important tool for business users, simply because device power is growing so fast. Mobile devices now allow users to do "the same sorts of things you do on your PC, and yet we call one a "phone" and the other a "PC," Landry notes.

Appetite for "Bundles" Varies

With service providers spending so much attention on creating sticky bundles of services, and with so many suppliers seeking to "move up the value chain" or "add more value" to their existing product lines, it is interesting that businesses of various sizes have apparently distinct appetites for the "one throat to choke" principle that drives buyers to consolidate their buying and use fewer vendors. Very small businesses just don't seem to have the immediately compelling desire to consolidate suppliers. Well over 55 percent of very small businesses don't see the advantage of consolidating their buying of voice, Internet and mobile services.

This seems odd, if the Triple Play is seen as viable for small businesses as well as consumers. In contrast, well over 65 percent of enterprises with 250 to 10,000 or more employees prefer to consolidate their buying. Still, 40 to 50 percent of small businesses with two to 49 employees say they prefer the bundled approach for voice, Internet and mobile services.

So Far, Short Form Rules

About five percent of North American users who watch video on the Internet, and polled by ABI Research, say they have rented or purchased a digital movie download, a lower overall number than indicate they have downloaded a movie free from a peer to peer sharing site. Movie downloads, both legal and illegal, remain the least watched genre of online video on the Internet, where short-form content such as sports and news clips is watched by nearly 7 in 10 of those that watch Internet video.

"The vast majority of those watching content online are watching short-form content such as news and sports clips," says ABI research director Michael Wolf. "Older users in particular watch primarily news and sports, while younger users are watching more entertainment content, including viral media provided by sites such as YouTube."

You probably aren't surprised by this finding. For starters, movie downloads are something of a nuisance at the moment. First of all, the whole catalog you might be interested in is never in one place. So there are search "costs," paid in your time. Second, there's still some hassle involved for downloading, depending on the actual bandwidth one has available. It isn't just the time it takes to download a movie, but the other stuff one can't, or doesn't want to do on a PC, while a download is in progress. A user's time, in other words, represents a real cost, even if it isn't a directly measurable financial cost. Finally, there are product substitutes, and many of them are arguably better substitutes, at least for the moment.

When ABI Research asked consumers why they chose not to watch movies downloaded or streamed from the Internet, the biggest reason was satisfaction with existing cable and satellite services as well as DVDs. About 48 percent of respondents indicated they would never purchase a movie online for download because they were satisfied with their current providers and the rental market. We do think that will change, with time, but the fact remains that there are lots of viewing niches even within the market for "movie viewing."

Most people will watch most movies once. Some users will watch some movies twice. Children will watch the same movie lots of times. So the market segment "movies my children really like" is better served by a prerecorded DVD with no usage restrictions. The market segment "relatively current release we only want to see once" is quite a different market, in terms of delivery mode. Downloading makes sense for the latter. It almost never makes sense for the former.

Downloading to a notebook PC by a user who has no other family members who will want to view the movie is a different value proposition than downloading of a movie when most of the family, or at least two members, want to watch it. PC viewing often is suitable for the former. PC viewing normally is objectionable in some ways in the latter case. And end uses tend to say they are much more likely to download content if they can view it on a TV.

"Despite the growing interest in the pay market for Internet-delivered video, perhaps the biggest remaining hurdle to widespread adoption is that the status quo usually gives consumers a vastly superior, and often less expensive experience than Internet-delivered content," says Wolf. "The industry needs to develop reasons and business models that increase overall consumer interest in Internet delivered video, including allowing for easy transfer and better viewing on the large screen."

No Doubt About It

Regular weekly usage of new media is growing at high double digit rates, while regular usage of legacy media is dropping, albeit only at single digit rates, with the exception of magazines, which are dropping at about a 12 percent rate. All of the growing formats have a network delivery or core communications element to them.

Percentage Growth of Regular Weekly Media
Medium Regular Weekly Usage
TiVo/Replay TV 88.1%
Satellite Radio 79.9%
IPOD/MP3 Player 72.1%
Blogs 63.2%
Picture/Video Phone 59.2%
Text Messaging 58.8%
PDA 14.0%
Traditional Media
Magazines -11.7%
Newspaper -7.1%
Radio -5.7%
TV -5.2%
Source: BIGresearch, December 2006

Mutliple Wars Raging

Scoff if you like about the ultimate business models that might develop around user generated video content, but the trend will intensify competitor triangulation in the coming market share wars that are ranging at multiple levels. The access battle has telcos and cablecos, plus specialized wireless and other players competing for "lines." The "services" battle is being waged between portals and between portals and the access providers.

In some respects the "access" providers will bundle and tweak their walled garden and possibly some Internet applications so they work better, experience-wise. The portal and app providers will seek to create interesting community interaction or portal content experiences so users can be enticed to use other features. The key here is that rich communications and entertainment will be primary forms of "bait" to entice users to show up and stick around. So far, the main battle has been between the major "access" providers. At some point, though, compeitition at the other layers (intra-portal; portal versus access; service versus app) will emerge.

Smaller developments, such as the user generated video trend, as shown here by analysts at The Yankee Group, are laying the foundations for the next phase of competition.

SME Business VoIP Uptick

SMEs seem, at least according to one projection by Infotech, to be getting the message on hosted and premises-based business phone services. Adoption rates are tracking large enterprise deployments pretty closely, after initially trailing. There's growing evidence that prices also are getting more interesting as well, in large part because premises-based systems are becoming more affordable, thanks to Asterisk and other open source platforms, as well as suppliers such as Samsung staking out new price point terrain.

WAN Will Be Driven by Video, Obviously

Until recently, global backbone traffic was driven by voice. Then email, Web browsing and peer to peer traffic became significant traffic contributors. Clearly, though, high definition and other television-based traffic will be the dominant driver of global bandwidth demand, argue researchers at Information Gatekeepers. By 2010, as much as 94 percent of global traffic will be HDTV or IPTV content, IGI predicts.

Late 2008 Consumer VoIP Mainstream

Telecom industry executives and analysts generally believe consumer VoIP will hit mainstream status by late 2008 or early 2009, according to stl. They also believe that sometime in 2010, voice revenue will represent 20 percent or less of wireline service provider revenue. Mobile operators will be in the same position by 2011. Some 90 percent of respondents say the global telecom industry is undergoing a fundamental structural change.

Lots of Niches

Google is rumored to be talking to France Telecom's Orange unit about a Google phone optimized to support Google search functions. In Romania, Zapp is targeting the SME space, especially frequent business travelers and expatriates, with a prepaid EVDO mobility service. The point is that Web and IP platforms, as well as open source and other Web 2.0 programming tools and concepts will enable creation of many new service niches. The Google phone might ultimately appeal to specific groups with high needs to conduct search operations when away from their PCs, sort of a new subset of the "BlackBerry" and "push email" user base.

Throw it On the Wall and See if it Sticks

Though it isn't the way service providers are used to doing things, allowing customers to discover services they like is about as rational as anything else a provider might try. Especially when everybody is in discovery mode anyways. Mobile providers "discovered" the popularity of short message service, rather than being able to predict such success. And if it doesn't die of its own weight, IMS is supposed to allow such discovery and trial processes. The Web is the other way discovery processes happen every day.

In 2005, Forester Research estimates, just 2.6% of Western European broadband consumers used VoIP for almost all their fixed-line calls from home. But matters will change dramatically. Forrester Research expects three in four European telco network broadband subscribers to use VoIP within 10 years. But the average incumbent telco will not get more than €63.58 (a bit less than $7 a month) in net annual VoIP revenues per broadband user in year 10. That, plus a dramatic shrinkage in revenue-beating access lines, as indicated by Technology Futures Inc. forecasters, highlights the urgency and strategic importance of new revenue streams. There simply isn't going to be all that much consumer voice revenue to get.

Churn: Watch What :People Do, Not What They Say They Will Do

As wireless number portability comes to the Canadian market, consumers seem to be telling The Yankee Group there is a significant chance they will use the opportunity to switch providers. But that's what people told researchers when number portability came in the U.S. market as well. While one has to be careful about inferring too much from experience in other markets, there is a fair to good chance not much incremental churn is going to happen. People often say they will do this or that. Sometimes there is a huge discrepancy between what they say they will do, and what they actually do. This is probably one of those cases.

50 Mbps Symmetrical Access From SureWest

SureWest Comms. soon will offer a 50 Mbps Internet access service (up and down!) for residential customers with access to the company's FTTH network. The company has been selling 10 Mbps and 20 Mbps symmetrical services for some time. SureWest is bundling the 50 Mbps offering in its newly-created “Ultimate” quadruple play package, which includes the 50 Mbps access service; a 250-channel digital TV service; National Unlimited local and long distance telephone; and Unlimited wireless with 1,000 travel minutes each month. The package costs $415.18 a month. If it were offered on a stand-alone basis, SureWest says the 50 Mbps service would be valued at $259.95 per month.

So think about it this way: A DS3 service should cost less than $300! And we can only hope that Verizon is able to stick to, or increase, its own FTTH deployment. Not that all that many residential customers need symmetrical 50 Mbps access today, at least not for any purpose within the scope of "acceptable use" policies. The problem is that at such rates, about the only application that really benefits is hosting of video servers inside the home. And that typically falls outside a service provider's notion of acceptable use. Still, it's an awesome advance in access bandwidth.

Many Internets, Many Models

Whatever positions one takes on the "future of the Internet," or the "future of the telecom business," one thing seems clear enough: The Internet is going to change, because it is fragmenting into multiple Internets, private Internets, regional Internets, application-specific Internets (as odd as the concept seems). We aren't going to live in a world with a single Internet, but rather a world in which there are many types of IP networks, some more open than others.

Mike Volpi Cisco SVP, argues that service providers (telco and cable, for example) can reshape at least parts of the legacy Internet. For starters, transport and access providers probably will be able to charge differential rates for varying levels of quality and higher levels of policy management, especially for real time services. Providers probably also will find they can charge different amounts of money for different amounts of upload bandwidth as well.

Stepping back from the inevitable policy debates about how much intelligence "needs" to be in the network, and what such intelligence might mean for new gatekeeper roles for transport networks, it seems clear enough that services such as high definition video and audio do require policies such as enterprises normally apply for their own traffic, to prioritize packets and bandwidth access. This is less a matter of "controlling the Internet" and more a functional requirement, though the danger of abuse cannot be discounted.

And while the notion of an "application-optimized" IP network seems counterintuitive, it makes lots of sense, if one assumes there are large, sustainable markets for applications of various types that benefit from network tuning. Video and voice provide the most obvious widespread examples, but there are lots of vertical market apps that also would benefit from network tuning. Gaming networks, security networks, hospitality and medical segments come to mind. Advertising, marketing, video post-production and other specialized news feed apps are obvious as well. Some apps just require network tuning. And it probably will turn out that these new apps are the ones with clear revenue models attached to them.

VoIP Mostly Works

Recent Mean Opinion Scores of VoIP traffic by Minacom show that VoIP audio quality pretty much works. Quality isn't uniformly high, because of the unmanaged nature of access bandwidth and the general state of networks some places in the world. But it works well enough to be useful. This obviously raises a question.

At some point, when the technology underpinning voice is nearly 100 percent IP, there may yet be ways to differentiate services based on levels of assured audio quality.

Managed networks probably still will be able to provide higher MOS scores on a consistent basis, compared to unmanaged networks, even though performance on unmanaged networks also will improve.

Of course, the other quality metrics should be capable of differentiation as well. Session integrity is the other current example of varying quality. Even when a VoIP call "sounds good," the integrity of the session might not be as good as a PSTN call. Voice VPNs will help, of course. So the issue is the degree to which unmanaged connections can be made more reliable by addition of VPN capabilities.

Simplicity Wins

U.K. small and medium enterprises surveyed by the Bathwick Group say they prefer to limit the number of suppliers they must deal with. Some companies are large enough to aggregate large amounts of value and can satisfy more wants and needs with one relationship. The other approach, better suited to smaller or specialized suppliers, is to provide a managed solution that removes complexity from the premises. Either approach will work.

What SMEs Will Buy in 2007

Pretty much what they bought this year. This chart from the Bathwick Group shows tools U.K. small and mid-sized businesses, for example, say they already have in the installed base.

So if you ask what they will buy next year, what do enterprises report? Intentions to buy that mirror the size of the installed base, for the most part, as shown in the second graph.

We always want to find the growth "silver bullet," but we have yet to see a case where buying priorities changed all that much from one year to the next. Over a five-year period, one can see significant shifts, of course.

But it is unusual, highly unusual to see buying behavior at an enterprise change more than five percent or so from year to year, in part because such a large percentage of spending is upgrades to the existing base.

So whenever you hear analysts, reporters or bloggers proclaiming this the "year of the X," take it with a grain of salt. The direction is probably right. The magnitude of spending shift won't match the hype. Never does. Every year is pretty much the "year we largely do what we did last year."

Now This Makes Perfect Sense

Telecom New Zealand has formed a joint venture with Yahoo!7 (the Australian JV that Yahoo has with media company Seven) to be called Yahoo! Xtra.

The point is that most of the wealth-creating innovation that will happen around the IP communications and IP media spaces will be created by people outside the telco orbit.

So instead of trying to do things that simply aren't in the company DNA, or buying and then destroying the DNA of innovator companies, just partner up, take minority stakes, co-develop and co-sponsor.

The cable companies figured this out a while ago. The other thing is that one doesn't have to own all of everything, or even all of some things. One simply wants to participate in the upside one's partners can provide. That's tough for control freak companies, to be sure. But it works.

Absolute Craziness

According to VoIP Weblog the Indian government is thinking about banning VoIP, because it is choking off tax collections. Apparently there has been some action around blogs as well, though we cannot confirm this. It's crazy!

Mobile Broadband Is Next, And Not Because Customers Now Want It

It takes no great insight to predict that the next great wave of growth in broadband access will come on the mobility front. The reason is simple enough: the consumer and business fixed line markets are close to saturation. This bit of data shows SME adoption of broadband. Recent reports from November consumer usage of broadband show that more than 80 percent of consumers who used the Internet that month used broadband access. And the point to remember is that "saturation" means nearly every customer that wants the product buys it. Some 20 to 30 percent of U.S. households don't buy broadband because they don't want it, in many cases because they don't own PCs, or own PCs but find their usage is so limited that dial-up actually works.

We expect the penetration figures to climb once broadband becomes a mass market platform for entertainment video, but the fact remains that buying of broadband for Internet access is close to its peak. And since suppliers always look for growth, they've got to turn attention to the places growth can be found, and that is the mobile market. The situation is very similar to what mobile carriers started to face five years ago, when they realized all the high-margin, then most of the mid-margin customers (adults), plus most of the formerly-unwanted low income segments were saturated. The one remaining customer segment not tapped was teenagers. So guess what? The industry went after teenagers to the point where most teenagers now have mobile phones.

The point is that supplier "push" can create its own demand, up to a point. And since the growth in broadband access lies squarely in the mobility space, that's where we are going to see serious efforts at demand creation. We do this all the time, by the way. Advertising aims to stimulate demand, in some cases convincing people they need something they presently do not. And marketing, recall, is the systematic attempt to create markets and customers, not simply to "respond" to existing demand. Mobile is next.

Value Chain Choices Have to Be Made

For most service providers, the biggest fear is a future where they are relegated to being providers of low-value, commodity-priced "dumb pipe." Which is why just about every telecom executive is looking at ways to "move up the value chain." Which isn't a misguided thought. The risk is that network companies will forget that the one unassailable value they do bring to the party is precisely their "dumb pipes." Which is not to say they have no experience with applications. POTS is after all, an application. But there's a gnawing, nagging sense that most innovation is going to come in the form of applications that ride on top of pipes, and that today's service providers might not be well placed to capture much of the value from those innovations. Again, not a random thought.

The problem is to find some path forward that maximizes the permanent value of access, transport, directory and other services in a world where some applications will be of the "walled garden" variety "telcos" can create and control, while many more apps will be "over the top" applications they won't be able to control or profit from.

At the end of the day, today's tier one carriers will probably have to recognize that "pipe" is the foundation of everything else they do, and a sustainable business in its own right. Some of that pipe might occasionally be "dumb." Most services, though, are going to require some degree of intelligence to be useful. Real time services, for example, require more intelligence than the best effort Internet to be useful. But there are going to be more private networks where something closer to dumb pipe is what the enterprise customer wants to buy.

Telcos will wind up being distributors of video in the consumer markets in a way analogous to cable operators, which puts them into the "apps" business. But they ultimately will have to concede that most of the apps business simply isn't going to be within their orbit, and that a sustainable business has to be built on being good plumbers, first and foremost.

There's nothing wrong with exploring and creating partnerships that provide a slice of the revenue. But there's great risk in believing carriers can change enough to be really successful app providers. It simply isn't in the organizational DNA. Tier one providers need to focus on the quality of their pipes (networks), first and foremost, and then on only a few applications they historically understand (POTS, mobility, special access, networking) very well. Straying too far from that core competency will prove quite dangerous. In that regard, video entertainment is going to prove to be an adjacency they can master. Other web-based services won't likely prove to be as logical.

Content Prices Sticky to the Upside

Pricing dynamics for content goods delivered over networks are fundamentally different from communication goods delivered over networks. And while "cost" is not necessarily "price," prices for video content seem to suggest recovery of costs in a way that is a bit more difficult in the core communications business.

Not Great for ARPU, Real Helpful for Churn...

Family plans have been really helpful to mobile service providers as a way of attracting more teen users, the last major customer demographic. And though family plans aren't great for average revenue per user metrics, they are quite effective at preventing churn.

Once teens sign up as part of a family plan, they are virtually committed and out of commission as a prospective new customer—often until they go to college or beyond. Only 12 percent of teens on family plans have switched service providers since they first got their mobile phones. As it turns out, hooking teens on a mobile provider is much more effective than getting a customer for their first new car, in hopes they will stick with the brand as they age.

The ARPU of a mobile user that is not on a family plan is $63.27, in comparison to the ARPU of $45.27 per person on a family plan, Yankee Group researchers note. Of course, these are "on average" figures. Many of us have teens using plans that are far in excess of these averages. At least 100 percent to 150 percent higher, in fact.

According to the Yankee Group, 81 percent of teens on post-paid service plans are on a family plan, up from 75 percent in 2005 and 54 percent in 2004. Some 70 percent of teens are on postpaid plans, so 57 percent of all teen subscribers are on a family plan.

SME VoIP: Buyers Interested, But Hesitant

Some 60 percent or more of small and medium business owners say they are interested in VoIP, but they also say they have concerns about the quality and cost, say researchers at The Yankee Group. Fortunately, these are the sorts of problems that get sorted out over time. Those of you who were early Digital Subscriber Line adopters know what I mean.

The Coming Measurement Problem

Measuring the size of the voice market is a problem the industry will start to face in greater measure as "telephony" becomes "voice" and "IP communications." The fundamental issue is that as voice and IP communications become embedded in the business models of other applications, it becomes harder to quantify the actual financial and business impact. Up to this point, quanitifying the size of the telephony business has been pretty simple. One has public reports by governemental agencies on the amount of wireline volume and revenue, as well as mobile volume and revenue. You add them up and derive th first order, retail revenues. Then economists can start adding in the full economic impact by applying multipliers.

But what does one do when voice and communications features are a "no incremental cost" sort of item? Voice will arguably be more important in the future, as it is embedded into gaming, documents, collaboration, portals, desktop apps. But it won't be as easy to separate "voice" and "communications" revenues from "multimedia," "entertainment," "enterprise software," "advertising" and other potential revenue streams.

In other words, the killer app of the communications industry remains "communications". But the ways communication gets monetized are changing. And that's going to make harder the task of figuring out where we are, since much of the value and revenue generated by communications features will not be generated in ways that allow easy disection of volume. Sometimes a "killer app" is offered on a "no incremental cost" basis. This is one way email might be considered the killer app to drive Internet access. It doesn't cost the user anything beyond the basic subscription, but the value of the app initially is high enough to drive the access business.

In a similar way, the value of a BlackBerry or smart phone device might be driven by the ability to use email on a mobile device, even if there is no incremental charge for the messages themselves. In the developing context, one adds VoIP and then entertainment video as contributing "killer apps" for broadband access service. Sure, broadband becomes important first as a way of avoiding the "World Wide Wait," not because there are new apps possible only with broadband. But then those apps are discovered by end users. Things such as VoIP and streaming media, telepresence and rich media in general.

All of which is going to make measurement of adoption, revenues and impact much more challenging.

Easier Management, Cost Savings Top Hosted VoIP Drivers

Enterprises consider "simplicity" and "cost savings" the top two reasons to consider a hosted VoIP solution, according to Forrester Research. Which makes perfect sense: enterprises tend to have technical staffs, so "lack of in-house resources isn't so often the case. Enterprises do tend to operate out of multiple, scores or hundreds of locations, though, which makes support of consistent voice features difficult. Neither are enterprises too worried about protection from technology change. Apparently IT managers are used to change, and confident of their ability to manage it.

Why Content Prices Rarely, If Ever, Drop

Telcos getting into the media business, despite the significant investments to do so, might enjoy the extreme differences between retail pricing dynamics seen in media as compared to communications. To wit, prices in the media world rarely, if ever, drop. In large measure, the reason is simply that costs in the media business are driven by content creation, and content creation is affected only marginally by Moore's Law, which operates to push down retail prices in the communications and computing space. There are, in short, some businesses that simply are resistant to operating cost reductions propelled by normal advances in chip technology, and the rapidly declining costs of processing and storage that result from such advances.

Not that media is the only endeavor that is not seriously aided by Moore's Law. To be sure, content creation is supported by Moore's Law. It's just that such costs are a small fraction of the total cost of producing content good enough to create an advertising, subscription or on-demand business model. Education is another business whose costs are marginally affected by Moore's Law, because production of the service ("teaching," for example)tends not to be scalable. To add another couple of classes at a college, one pretty much has to hire another teacher. Sure, you can grow class size, but at some point the "buyer" logically assumes that "quality" is destroyed as the scale increases. That's why small graduate seminars are generally considered "higher quality" than undergraduate "101" courses. We can argue about whether this is really a measure of quality or not, but the fact remains that most buyers of higher education seem to buy into the notion.

Content production tends to operate in much the same way. Digital special effects can apply Moore's Law in very compelling ways. But digital effects don't seem capable of replacing the very analog and non-scaling efforts of writers, directors, actors and producers, simply because the "product" is so wildly dependent to the particular skill some people seem to have in these areas. So, to an extent not seen in communications, where Moore's Law attacks the cost structure of a key input, digital technologies do not aid us as much in the creation of media products. Again, one can argue about how user-generated content might affect the model.

But experience suggests that we will see the same sort of "quality filtering" emerge in virtually all user-generated content as well. Most of it will not be broadly appealing, even in the niches for which it is created, for all sorts of reasons, just as the vast majority of "professionally produced" content these days, and the huge number of projects that never are produced or distributed widely, are filtered as well.

The upshot is that video services will not materially be subject to Moore's Law, and ever-decreasing retail prices. Producers and distributors are going to love that aspect of the business.

One Way Enterprise VoIP is Different From SME

The number one reason an enterprise IT manager looks at VoIP is to manage multiple phone systems at multiple locations, according to Infonetics. This is much less likely to be the top driver at a small or mid-sized business, simply because managing remote sites is typically less of a headache. Of course, some enterprises or SMEs might find a reduction in toll charges interesting, depending on where the sites are located. Still, SMEs are going to be much more worried, on average, about how well VoIP will work, and about costs of on-going support. Features still aren't paramount, but is steadily gaining importance as a decision driver, at least in the North American market. We hear this is less true in Western Europe.

This Might Mean iPod is Grabbing Even More Share

Digital music sales are stalling, according to the Wall Street Journal. It could mean all sorts of things. Apple's iTunes sales might be grabbing more share in a market that has hit a threshold of usage, as there still is no evidence iTunes sales have slowed. The market might be saturating, on at least a temporary basis, possibly because some users are pondering a change of platform and don't want to buy music in file formats that cannot be transferred to the new player. Illegal file swapping might be accelerating. Or it could be that the next group of mainstream adopters simply is discouraged from buying for all sorts of reasons, ranging from the cumbersome nature of digital rights management to the non-portability of files. Buyers who are committed to the iPod might be quite happy. More casual users might not.

LAN Certification, Monitoring for Business VoIP

We have been hearing from LAN certification and installtion companies that 30 percent or more of enterprise or small/medium business local area networks are not able to support VoIP services without modification. Others say their own experience is that half of all LANs need rework or upgrades before VoIP will work. It might well be worse. As many as 90 percent of local area networks are not completely prepared to support VoIP services, says Lawrence Trifiletti, NetStar-1 executive.

The other thing: "More than 70 percent of enterprises do not make baseline performance measurements before they deploy business VoIP", says Scott Safe, Network Physics VP. That's a problem because "data volume grows 40 to 50 percent a year," Safe says. So a network that might have been in tolerance a year ago might well not be in that state today.

Brightcove + YouTube = Disruption

Brightcove's Brightcove Network, backed by AOL/Time Warner, Hearst and General Electric (NBC), is on the path to being a true game-changer in the broadcast media sector, say analysts at Mercator Capital. "It has become evident that IP is going to disrupt the broadcast sector in much the same way it has already reshaped telecom," they say. So how is Brightcove different from YouTube?

The Brightcove Network is a platform to allow professional creators of video content to bring their product to market in a commercially viable manner. It is a platform, a distribution channel and an ecommerce portal. YouTube’s content is essentially user-generated and not geared for a broadcast audience, whereas content running on the Brightcove Network is produced by professionals who are commercially driven and seeking an audience, says Mercator. "These are very different positions on the spectrum," Mercator says. At least for the moment, we'd say. YouTube's monetization model will be advertising. Brightcove's will be advertising and content sales. Mercator argues the two firms occupy different parts of the developing value chain, but we are not so sure, in at least one respect. YouTube ultimately will emerge as a distribution channel for professionally-created content.

"The underlying story here is that Brightcove is providing substantial validity to the Internet for being an important channel for video," says Mercator. "Brightcove is all about video content to be viewed on the Internet, and has little to do with television, as most people know it," Mercator says. "As such, Brightcove is not just expanding the pie, but they are potentially the foundation for an entirely new industry." We shall see. Aside from the "amateur" and "professional angles, there might be little fundamental difference between YouTube and Brightcove at the level of distribution. Google, of course, would not likely be found producing original content, so that is where the two ventures really are different.

Brightcove also might prove to be a vehicle for wider use of video-based advertising by companies priced out of the broadcasting or cable markets. More evidence of emerging "long tail" market segments, we'd say.

Adobe Acrobat Connects

Adobe Systems has announced the immediate availability of the Adobe Acrobat Connect product line for web conferencing. You might wonder why. The way Adobe sees things, documents are about collaboration. Users routinely create and share .pdf documents with others. So why not enable rich media communication about those documents? Why not try to turn the Adobe Reader client, present on most user machines, as a VoIP or conferencing client? After all, among the largest challenges for any IP communications provider is to get enough clients into the hands of users to create critical mass.

The Acrobat Connect products enable users to create personal web sites that serve as meeting rooms. A standard Web browser and the Adobe Flash Player software, installed on more than 97 percent of Internet-connected computers worldwide, completes the task. There's no software to download, because the client already exists on most PCs.

The Connect hosted service, which allows a user to moderate a web conference, can be used for up to 15 participants for $39 per month, or $395 per year per personal meeting room. Connect Professional, which starts at $15,000, supports up to 2,500 users at the same time plus interactive multimedia, integrated telephony, and VOIP (Voice over Internet Protocol). Meetings can be recorded for on-demand viewing, among other advanced features.

To be sure, web conferencing remains a niche business. IDC predicts that the conferencing-applications market will represent more than $1.1 billion in 2007. Two of the biggest players in the Web-conferencing market are WebEx, which has two thirds of the market share, and Microsoft, which purchased number two player PlaceWare.

But if you believe IP makes possible the emergence in newly visible ways of many "long tail" market segments, then web conferencing might in a genuine sense be seen as a current segment that will differentiate even further. And there is growing evidence of adoption by enterprise and small business customers.

In a survey, 41 percent of Citrix Online small and medium business web conferencing users say Web conferencing is more popular than meeting in person (41% vs. 36%).
Well over half of SMEs surveyed (56%) say they use Web conferencing to solve problems they could not solve before.

90 Percent Broadband by 2008

Cowen & Co. expects the dial-up Internet access market to have declined by 29 percent by the end of the year. Analysts also expect broadband share of U.S. Internet households to reach 72 percent by year-end. "We expect U.S. broadband penetration to reach 72 percent of total Internet households in 2006, 84 percent in 2007, and 90 percent in 2008," Cowen analysts say. "We believe dial-up access...will disappear within the next six to eight years," the analysts say. "We estimate that dial-up subscribers will decline to 20.6 million in 2006 and 12.4 million in 2007."

Cable companies reported 1.3 million net broadband additions in third-quarter 2006, up 20 percent from 1.1 million in the year-ago period. DSL service providers added 1.2 million residential subscribers in third-quarter 2006, down from 1.3 million in the year-ago period, assuming 10 percent of total DSL net additions are nonresidential.

AOL is a big reason for the decline. "We estimate that AOL's dial-up subscriber base will decline rapidly to 3.3 million at the end of 2007 from 9.6 million in the third quarter." AOL reported a decline of 1.9 million dial-up subscribers in the third quarter, which represents a 17 percent sequential decline in the subscriber base. Total AOL dial-up subscribers are down 35 percent year over year to 9.6 million from 14.7 million in third-quarter 2005.

The EarthLink premium dial-up subscriber base declined by 132,000 in the third quarter, compared with a 163,000 decline in the second quarter. PeoplePC, EarthLink's value dial-up asset, reported net additions of 51,000 in third-quarter 2006. United Online lost 131,000 subscribers in the third quarter.

Cowen & Co. also says U.S. VoIP subscribers increased 19 percent quarter over quarter to 6.9 million in third-quarter 2006, excluding Skype and similar nonsubscription services.

Metro Ethernet Market Appears Robust

Growth rates for metro Ethernet services are 40 percent and higher annually, says ANDA Networks Tony Tran, senior product manager. Some of that growth is coming at the expense of traditional T1 and DS3 services, and much of the growth rides on copper access rather than optical facilities.

Dedicated access services (T1, DS3 and other private line) represented about $16 billion in revenues for the largest incumbent telcos in 2005, says the Government Accounting Office. Some of that was DS3 and higher rate access, but more than $8 billion was comprised of T1 services.

And as is always the case, few actual business locations are directly served by optical access from any provider, much less multiple providers. In the 16 major metropolitan areas the Government Accounting Office examined, competitors to the incumbent telco are serving, on average, less than 6 percent of the buildings with demand for dedicated access in these areas. For buildings with higher levels of demand, facilities-based competition is more moderate, with 15 to 25 percent of buildings showing competitive alternatives.

"Obviously, fiber reaches only about 10 percent of all business sites," says ANDA Networks Tony Tran, senior product manager. "So reach is really the problem." The immediate problem is that many, if not most business customers require access bandwidth in excess of T1, with 6 Mbps being common, says Tran. Hence the growing popularity of Ethernet-over-copper access. By bonding multiple T1 pairs, service providers can emulate 10 to 100 Mbps access services, without ripping out the copper and without disturbing the SONET infrastructure already in place.

A Choice to Make

If, or perhaps just "when" SIP mobile devices get traction in the mobile market (Disruptive Analysis argues naked SIP device adoption will outpace IMS), mobile operators will face a choice. Do they "play nice" and allow third party entities to set up SIP sessions, or do mobile providers want to impair or block such sessions. The issue isn't "whether" they can do so. The issue is "will" they do so. Organizational DNA will scream "block," more so in the U.S. and Canadian markets than in Western Europe, we suspect. The current user agreement for Verizon Communications 3G service already bars its use for VoIP, for example. Ultimately, this strategy seems likely to fail.

And there are a number of scenarios that could produce an "open" result. The industry might find that enough revenue is captured from walled garden services that the value of a "naked SIP" feature, though it causes some revenue loss, is tolerable, and more than offset by the good will an open approach offers. Mobile providers might find that the financial results aren't so pleasing, but just one mobile provider of reasonable influence has to go "open" to put pressure on the others. Or, conceivably, if not likely, the market might evolve in ways that make open, third party offerings a mere annoyance, not a significant revenue challenge, and therefore not worth blocking. Regulatory barriers to such action might someday arise as well, as interconnection frameworks are applied to some SIP-based services.

And though not every potential or existing customer will even notice that a service is a walled garden, an increasing number will be aware that this is the case, and won't like it. This market segment provides just enough revenue at the margin to create pain if its business goes elsewhere. So in the end, third party SIP apps will function on IMS-based mobile devices, outside the walled garden.

Since Ericsson and Intel are collaborating on an extension of IMS to notebook PCs, there's another logical path for third party apps, even though IMS tends to be seen as a "closed" or "walled garden" approach (for business strategy reasons, not technological reasons). Still, there's arguably a higher barrier to service provider blocking for any features and services that are popularly seen as "computer" features, rather than "phone" features, in both the popular mind and regulatory bureaucracies. Still, there will be choices to make.

Why SIP Trunking is Hot

Companies can extend VoIP beyond the company private networks already in place, and reach off network customers, suppliers and business partners. Companies eliminate the need to buy and operate voice gateways and T1 connections, using less expensive IP connections. Ultimately, there are new applications taking advantage of SIP.

Why In-Home Networking Will Grow

People will buy more content on a download basis if they can port it to a TV for viewing. And because moving video content or voice around a network is quite a bit more complex than simple non-real-time data files, more value and revenue will be created in the system integrator and value-added distributor parts of the value chain. So traditional data networking, LAN specialists and high-end audio-video installers will wind up doing consumer home network installations. Up to a point, so will cable and telco installers.

Good News, Bad News

There was good news last year for U.K. service providers, according to Ofcom. Household usage and adoption of communications services accelerated. The number of households with broadband connections increased by 63 percent between 2004 and 2005, to a total of 9 million and the number of households with digital television also increased by 18 percent between March 2005 and March 2006, to a total of 18.3 million. Mobile phone usage also increased, accounting for 31 percent of all call minutes, up from 28 percent in 2004 and 20 percent in 2001.

The bad news is that aggregate customer spend seems to have dropped, despite the upsurge in usage.

Between 2004 and 2005 typical household telecoms costs fell by 5 percent, from £80 a month to £76 a month.

Ofcom data also shows that younger consumers are turning away from television, radio and newspapers in favour of online services , including downloadable content used on mobile devices. Television is of declining interest to many 16 to 24 year olds, Ofcom says. On average they watch television for one hour less per day than the average television viewer.

Instead, the internet plays a central role in daily life. More than 70 percent of 16 to 24 year old internet users use social networking websites, compared to 41 percent of all U.K. Internet users. The same group also uses mobile phones extensively, on average making seven more calls and sending 42 more texts per week than the wider U.K. population. Radio listening also is lower, by an average of 15 minutes a day compared to the wider population. Some 27 percent of those surveyed said they read newspapers less as a consequence of their online usage.

Different Platforms, Same Problem

A common challenge faced both by wired and wireless providers is the huge capital recovery challenge each faces from building of broadband networks at a time when voice revenues are dropping. Which is why the search for video, content and ad revenues is so urgently a priority. Sun Microsystems, for example, is adapting its Java System Content Delivery Server for mobile networks.

Sun's CDS provides a common infrastructure for delivering all types of content, including Java applications, games, ringtones and wallpaper. It also lets operators create storefronts, viral marketing tools and payment systems. It lets the carriers and other content providers set up services more easily and quickly, the company said.

Sun's move also illustrates another change that has taken place in the global telecom industry. Once upon a time, service and technological innovation was driven by the carriers themselves. That, after all, was what Bell Laboratories was all about. These days, innovation is in the hands of industry suppliers, not the service providers.

Which illustrates why major service providers no longer can hope to profit over the longer time by technological innovations. The suppliers will simply sell the latest and greatest to all the other contenders. Think back to competitive local exchange carriers buying Class 5 switches. Nice, but undifferentiated.

Instead, the sources of enduring value will have to be sought elsewhere. Knowledge of discrete customer segments and requirements will help. Better ways to move products out of the "factory" and into the hands of end users also will help. Unique content probably will help at the margin, but only at the margin. The bulk of interesting content will be offered by one's major competitors. And the problem faced by service providers there is pretty much the same as the technology supplier problem. All of the content suppliers will be anxious to sell as much of what they own to multiple buyers.

Oddly enough, it may prove to be the case that more efficient and effective channel relationships, part of the process of moving services out of the factory and into the market, will provide more enduring differentiation than content or technology platforms.

Consumers Confused, Long Tail Reigns

Consumers are confused and overwhelmed by the vast array of services telcos now offer, say analysts at Ofcom, the U.K. telecom regulatory agency. 

A "significant minority" of consumers have trouble working out which company offers the best value or quality of service on particular packages, Ofcom says. As it turns out, the huge range of services available, from phone line and broadband to cable television and mobile phone, confuses consumers. 

 Twenty-seven per cent of people find it hard to make cost comparisons for fixed-line phone services, Ofcom research reveals, while 34 per cent find it difficult to choose internet suppliers based on quality of service. 

 All of which points out why the "long tail" of telecom will continue to operate. Which is to say that cable company and telco basic packages will continue to maintain dominant market share. In an effort to reduce complexity, many consumers are simply going to choose from a small subset of relatively complete packages offered by the dominant providers in a market. That doesn't all buyers will do so, though. 

A significant percentage are going to go with some sort of "best of breed" approach that shifts demand "out on the tail of demand." And more customers will ultimately find they buy both a "package" of some sort from the dominant providers, as well as tailored services provided by others "out on the tail." 

 There are niches within the broader distribution of market segments as well. Looking just at today's use of mobile data apps, the same "long tail" already is apparent. SMS gets wide use by just about everybody. After that, usage trails off.

BT Sharply Reduces Reliance on Voice Revenue

BT has done a far better job of diversifying its revenue streams, by some measures, such as the percentage of total revenue coming from voice. BT gets less than 20 percent of its total revenue from voice. Most other tier one providers still generate 60 percent of more of total revenues from voice. In at least some cases, voice represents 80 percent of total revenue. In this regard, BT arguably outperforms all other tier one service providers.

This might explain BT's bullishness about its new all-fiber, all-IP network. It already can see its own future as one in which voice is not the dominant revenue driver. Nor is BT suffering from the scale of its capital investment. BT's profit in its second quarter rose 28 percent to £475 million, or $905 million, on sales of broadband Internet access and corporate computer-network contracts. BT's revenue rose 3.7 percent to £4.94 billion in the three months ended Sept. 30. We still will argue about the wisdom of 21CN and the pace of building all-fiber, all-IP networks. But BT seems to be getting the job done.

VoIP Audio Quality is Better, says Minacom (Tektronix)

Since late last summer, VoIP phone service has sounded better and connected faster than the public phone network, according to data collected by Minacom (Tektronix). Results show that VoIP service quality has increased steadily, with an average Mean Opinion Score (MOS) of 4.2, compared to 3.9 for the PSTN (scores range from 1 (worst) to 5 (best). Based on a MOS threshold of 3.6, only 1 out of 50 calls in North America were considered to be unacceptable (about 1 in 10 worldwide)while greater than 85 percent of VoIP calls exceeded average PSTN quality. In addition to superior sound quality, calls over VoIP connected quicker overall (8.2 seconds on average, compared to 8.9 seconds for those placed over the PSTN).

As happy as you might be about improving VoIP audio quality, uou might wonder about the performance of the public network. There are a couple of things at work here. First, lots of calls are now mobile to mobile or have mobile on one end. That automatically hits quality. The other thing is that perhaps a majority of international calls are terminating at one end in parts of the world where the public network simply isn't very good. In those cases, VoIP often does sound better.

Even though VoIP might sound better than the public network on average, including all calls to areas with poor public networks, the same sort of MOS score distribution probably wouldn't be seen so much for intra-country calls in North America, Europe or parts of East Asia. The other thing is that calls arguably traverse more networks and network elements now than was typical in the past. That can't help, and can harm, audio quality, as impairments accumulate.

Video Downloads, PPV, VOD Won't Top DVD Sales Any Time Soon

Though most people think video downloading will wipe out the DVD business, Kagan Research forecasts that U.S. consumer spend on VOD by 2016 will still be smaller by a wide margin. The company forecasts that U.S. consumer spending on video on demand and pay per view will be one-quarter the consumer spend on U.S. home video in a decade.

U.S. on-demand programming is forecast to grow at a 12 percent compound annual growth rate over the next decade, reaching $8.7 bil. by 2016. The CAGR for U.S. home video software will be under 3 percent over the same period, yet on a total dollar basis it still remains much larger, Kagan researchers argue.

Wireless, Not Skype, Cannibalizes Wireline Voice

It appears that Skype now represents a bit more than four percent of global long distance traffic, says TeleGeography. Skype users generated about 6.6 billion minutes of traffic in the third quarter of 2006, and are on track to make over 27 billion minutes of PC-to-PC calls this year, TeleGeography says. About half of Skype's traffic is international.

Still, the global switched and VoIP traffic base represents 264 billion minutes of use annually. So how about PC to PC Skype traffic? Last year such traffic was equivalent to 2.9 percent of international carrier traffic, and 4.4 percent of total international traffic in 2006. Furthermore, not all of Skype’s traffic is a net loss for international carriers. SkypeOut keeps traffic and revenue on the public network, at least for purposes of termination. SkypeIn provides a similar benefit for termination of traffic.

Still, it’s clear that VoIP services will continue to gain in popularity. "Someday, all calls will be routed over the Internet," says Stephan Beckert, Research Director at TeleGeography. “But the numbers suggest that traditional international carriers aren’t going to disappear anytime soon.”