Monday, April 30, 2007

This Might be Good for Vonage

In a decision issued April 30, the U.S. Supreme Court reinvigorated the "obviousness test" used to determine whether a patent should be issued. Ruling in the case of KSR v. Teleflex, the Court found that the US Court of Appeals for the Federal Circuit, which handles patent appeals, had not been using a stringent-enough standard to determine whether a patent was infringing.

At issue in KSR v. Teleflex is a gas pedal manufactured by KSR. The pedal has an electronic sensor that automatically adjusts its height to the height of the driver. Teleflex claimed that KSR's products infringed on a patent it held. KSR said that Teleflex's patent combining a sensor and a gas pedal was one that failed the obviousness test, and as such, should not have been granted.

Since 1952, legislation has mandated that an invention can not be patented if a "person having ordinary skill in the art" would consider it obvious. Many observers think Verizon's patents are overly broad. Basic mechanisms for connecting calls between the public switched telephone network and IP networks might be a similar sort of thing.

KSR argued that the US Patent and Trademark Office should have denied Teleflex's patent, as it only combines components performing functions they were previously known to do.

The Supreme Court ruled that the Federal Circuit had failed to apply the obviousness test. "The results of ordinary innovation are not the subject of exclusive rights under the patent laws," Justice Anthony Kennedy wrote for the Court. "Were it otherwise, patents might stifle rather than promote the progress of useful arts."

The Supreme Court also said that the Federal Circuit's conception of a patent's obviousness was too narrow. "The Circuit first erred in holding that courts and patent examiners should look only to the problem the patentee was trying to solve," according to Justice Kennedy's opinion. "Second, the appeals court erred in assuming that a person of ordinary skill in the art attempting to solve a problem will be led only to those prior art elements designed to solve the same problem."

So Teleflex's patent has been invalidated and more importantly, the Federal Circuit will now have to pay closer attention to a patent's obviousness. That may be good news for Vonage.

EarthLink Not So Sure About Muni Wi-Fi

EarthLink says it is studying the financial performance of its municipal wireless Internet networks in four cities--Philadelphia, New Orleans and California's Anaheim and Milpitas--before deciding how to move forward with similar Wi-Fi networks elsewhere.

While more cities are expressing interest in striking deals with the company, EarthLink is "not yet able to establish that comfort level" that the investments are really profitable, says Kevin Dotts, EarthLink's chief financial officer.

That's sort of the whole problem with Wi-Fi. It is a fabulously useful local access tool. It just never is quite so clear that it is a business, or a good business. Indoors is one story. Outdoors is quite another. As useful as Wi-Fi is indoors, muni Wi-Fi suffers in that respect. Sure, handhelds capable of doing something useful with outdoor Wi-Fi are getting to be more common. But they aren't yet real common. And I don't know about you, but I never use my notebook outdoors. My mobiles don't have Wi-Fi access. And I'm not really interested in downloading music to my iPods using Wi-Fi. Other people might want to do these things. The issue is whether there are enough of them.

It's Hard to Do Any Better Than This

Verizon added more than a million new wireless customers in the first quarter, outpacing at&t. And its churn remains astonishingly low. Millions of households move every year, and the propensity to move is much much higher for younger mobile users, who might arguably represent the highest churn demographic. A household churn rate of just one percent a month (people moving) would still generate 900,000 switchers in a quarter. Of course, mobile providers have one advantage wireline providers do not. When somebody moves out of state, the mobile account doesn't necessarily have to change. The landline voice, broadband access and video account might well have to. So wireline services always face an uphill battle to get churn down to just one percent a month.

Sunday, April 29, 2007

It's All About ARPU and Churn

How bundling is good, or whether bundling is good for customers might be debated. There isn't much question about whether it is good for service providers. "When you look at consumer customers from a bundled standpoint, customers that are stand-alone voice customers have ARPUs in the low $40 range," says at&t CFO Rick Lindner. "As they begin to bundle and as we move them upwards to a full-quad bundle where they have got voice, data, video and wireless from us, all of a sudden that customer moves to a $250, $260 kind of monthly customer"

"At the same time, the churn rates are cut by two thirds when you move from that stand-alone voice customer to a full-quad bundled customer," he says.

At the end of the day, this is about supplier push more than end user demand. It isn't the "bundle" users want, it's the monetary savings. Innovations will occur, neverthless. So in the end, bundles will lead to something besides higher ARPU for providers.

Friday, April 27, 2007

Specter Haunting Cable Companies?

“It’s all clicking, our business is on fire,” says Comcast CEO Brian Roberts. Maybe so. But we sometimes forget that the cable industry is in the same position as the telephone industry. Namely: its core business is under fire and will not drive growth in the future. So each industry is racing to create new business models where legacy revenue is half or less of total revenue in a few years.

About half of Comcast's subscribers will also use its phone and broadband services by 2010, Roberts says. Roberts believes that within two to three years, half of the company’s customer units will not be cable TV, but instead will come from Internet access, telephony and other services. At that point, he says, “half of Comcast is no longer just a TV company.”

With the caveat that a stock price isn't a complete proxy for the anticipated fortunes of a company or industry sector, U.S. cable operator prices have sagged of late. In Comcast's case, it is a bit hard to know why. Comcast added 75,000 basic cable subscribers in the quarter, 644,000 digital subscribers, 563,000 cable modem customers and 571,000 VoIP customers.

With 2.5 million VoIP subscribers, the company may now be bigger in Internet telephony than Vonage, which had 2.2 million customers as of the end of December.

The company repeated previous guidance that 2007 cable revenue growth will be at least 12 percent, with cable operating cash flow growth of at at least 14 percent.

To be sure, free cash flow is down. Comcast generated $442 million, versus $807 million a year ago.

So maybe investors are spooked by higher capital spending trends. Or maybe it is something else. Maybe the threat of over-the-top video finally is starting to register as another threat to the legacy cable business. Sometimes we all forget that cable is an incumbent. It has a legacy business that has gone into reverse after decades of sheer growth. And it also faces competitors able to innovate at Google speed. And might we add, Apple speed.

Thursday, April 26, 2007

Viral Adoption for Enterprise

The integration of the Iotum Talk-Now presence app with Jajah for calling on BlackBerrys illustrates a new approach software distributors can take to penetrate enterprise accounts. You know the old way: direct sales teams target "C" title executives. Key decision makers then are identified and the account is "worked."

There's another model. Harken back to the days when computing was centralized, lived in a "glass house" and terminals were dumb. If you wanted to sell a personal computer or a local area network to connect them, what would you do? You weren't going to get the glass house shut down, so the top down, rip out the mainframe, forklift route wasn't promising.

Instead, you targeted individuals. Lead users. Power users. You flew under the radar. You kept the upfront cost low. You didn't require a change of enterprise computing architecture. And then you let interest spread virally.

Lead users, work groups and then departments. That was the adoption approach. One person brings the application into their environment, and invites their circle of business colleagues to participate, setting off a wave of adoption within a specific business or social network.

And that is what Iotum and Jajah hope will happen.

Wednesday, April 25, 2007

Commoditizing SMS?

Given that short message service is a high margin product delivering between a third and half of most mobile operators’ profits, STL Partners wonders what threat third party providers might represent. Alternative services allow users to connect to a third party gateway over the Internet (using GPRS, 3G, or Wi-Fi) and send text messages affordably.

Service provider execs who remain optimistic about keeping the business say users are too lazy or indifferent to the cost of SMS to switch. A general shift towards IM features will moderate costs and provide a richer alternative. There will be spam and privacy issues. And service providers will just drop prices if they have to.

Executives seeing a larger threat suggested that messaging will be embedded in third party applications, notably social networking services, and that operators will lose control of the context from which messages are initiated — as well as the revenue.

The STL graphic shows the percentage of business lost to third party providers in five years.

Iotum and Jajah Partner

The Iotum Talk Now application, a presence manager running on Research in Motion's BlackBerry, now has been integrated with Jajah, the Web-enabled calling application. ah is integrated into the iotum application. Very nice. Of course, now I am having an even harder time weighing two crucial device decisions. Do I ditch Windows and go Mac? And do I ditch BlackBerry and go iPhone?

As a former Mac fanatic, I finally had to switch to Windows because all my trading partners were on that platform, and at that time the Web really wasn't available to mediate most communications and applications. It is safe to say I've never enjoyed or really liked Windows. The big issue now is how many of the applications I get asked to test, or actually use, will be available on the Apple OS. Don't know yet, but this probably is the decision hinge.

Push email was a huge innovation when I first got it. But I'd have to say push email isn't a compelling reason to keep my BlackBerry any longer. Lots of devices do that. And when I focus on BlackBerry's interface and ease of use, it falls down. Right now, Iotum is the reason I'd be reluctant to switch. And Jajah integration is an even bigger plus.

If you wonder whether applications make a difference in device choices, I'll tell you this: in my case Iotum and Jajah now stand between iPhone and a new service provider.

The PC decision is more complex, since there are multiple apps I wouldn't want to risk messing with, and others that will show up, even if the hassle and irritation factor is very high.

Tuesday, April 24, 2007

Vonage Wins Permanent Stay

The U.S. Court of Appeals for the Federal Circuit in Washington D.C. has issued Vonage a permanent stay of a previous court's injunction that would have barred it from signing up new customers.

Vonage sought the stay following an April 6th decision by the U.S. District Court in Alexandria, Va. enjoining the company from using certain VoIP technology to add new customers. The permanent stay enables Vonage to continue adding new customers as it pursues an appeal of the patent infringement ruling.

Vonage will however continue to pay into escrow a quarterly royalty of 5.5 percent throughout the appeals process and also will post a $66 million bond as required by the court.

"We believe the original verdict was based on an erroneous claim construction -- meaning the patents in this case were defined in an overly broad and legally unprecedented way," says Sharon O'Leary,Vonage EVP and chief legal officer. "We believe the district court's decisions repeatedly neglected well-established law on claim construction and, as a result, artificially expanded the coverage of Verizon's patents well beyond what was intended by the patent trademark process."

Wireless Rules

At the end of last year there were 233 million wireless accounts in service in the U.S. market. Access lines in service at the largest eight U.S. wireline carriers amounted to 139.2 million (at&T, Verizon, Qwest, Embarq, Windstream, Century Telephone, Citizens and Cincinnati Bell). Not to mention the directional change: wireless is still climbing, wireline still dropping. Of course, one has to add back in three million cable industry voice customers. But you get the point. Wireless increasingly is the way the mass market does voice.

Communications as Consumer Electronics

As more and more mass market communications gear becomes an extension of the consumer electronics business, more of the rules of that business start to apply. Among the key rules are: keep the price low, make it simple to use, address a real need, design attractively, build retailer relationships and adhere to standards because one requires volume. Every January, hundreds of new products are shown at the Consumer Electronics Show, and most of them fail.

So consider MobiGater, a USB device that transfers Skype calls to a mobile phone without using SkypeOut credits. The €270 ($370) box works like any other plug-and-play USB device. Once connected to your desktop computer, all Skype calls are redirected to a mobile. Heavy mobile users in markets with high costs might find the gizmo worth buying and using. But there will be issues. It always is tough to sell a peripheral that costs as much as the processor the peripheral is supposed to be used with.

The user requires an additional SIM card for the MobiGator, so while the Skype call might be free, there's the cost of the mobile SIM cards to deal with. The historic tipping point number for a popular consumer electronics device used to be $300, so MobiGater remains just a bit on the high side. On the other hand, recent sales of high definition flat panel TV displays have broken clear of the $300 mark.

The longer term problem is simply that the cost of calling, and the effort one has to put into reducing those charges using Skype and MobiGater, simply don't solve a big enough problem to drive mass adoption in many markets and customer segments. VoSky has a similar product aimeda the home and small office user. VoSky's Internet Phone Wizard allows users to make Skype calls from anywhere with a cordless or regular phone instead of the computer speakers.

The Internet Phone Wizard also supports outbound Skype calling from the regular handset. PSTN is the default. A couple of key taps switches the phone to Skype mode. The device also can be used to create a virtual second line.

Still, the consumer electronics market is brutal. Most products fail, or succeed only quite modestly, in some niches. To really change end user behavior requires a huge carrot in terms of advantage. There's no question the MobiGater and VoSky devices are useful to some people with high calling costs and heavy mobile use. It just isn't so clear there's a mass market for either.

Monday, April 23, 2007

Time Warner Cable to Work with Fon

Sometimes a service provider simply has to cooperate with what might be seen as a direct competitor. So it is that Time Warner Cable is going to allow its users to create publicly accessible hotspots in cooperation with Fon, the company building a network of private Wi-Fi connections. Time Warner will allow its home broadband customers to turn their connections into public wireless hotspots, a practice U.S. ISPs generally have said is outside "fair use" policies. Verizon Communications Inc., for example, can terminate contracts if it finds an ad-hoc hotspot.

Fon and Time Warner will split the proceeds from use of Fon hotspots by non-members. That is expected to be $2 to $3 a day. Fon network users can offer free access to all other Foneros in exchange for reciprocal privileges, or can offer for-fee access.

The Fon wireless router splits a Wi-Fi connection in two: an encrypted channel for the Fonero and a public one for neighbors or other casual users. Foneros can decide how much of their bandwidth to share with the public and can log on to any Fon router without charge, in return. "Aliens," as Fon calls nonmembers, can register on a Web page and pay a modest $2 or $3 for 24 hours of access.

Fon has about 60,000 Foneros in the U.S.

Time Warner may be looking ahead to the not-so-distant future when some of the 300 or so municipal wireless projects featuring free or inexpensive broadband are available, as it operates systems in large cities where such muni Wi-Fi efforts are most pronounced.

Saturday, April 21, 2007

So Maybe It's the Lead Offer...

...not the only offer. Most Western European consumers still buy Internet access separately from other services like fixed voice, VoIP, TV, or mobile, says Lars Godell, Forrester Research analyst. "Very few Europeans get either triple or quadruple play delivered in one integrated package," he says. U.S. bundle buyers might be more commonly found, but even in the U.S. market it is far more common to find dual play buyers than triple play.

Researchersa at The Yankee Group recently found that 41 percent of buyers chose a dual play package, compared with 23 percent for a triple play bundle.

Of course, it always takes some time before mass market buyers warm up to some new services and packaging techniques. Digital cable and satellite didn't reach their current penetration levels in a year or two. Also, promotions for triple play packages seem to alternate with "add voice" or "add video" or "add high speed Internet access" offers from either cable or telco providers. The thought, of course, is that there is less resistance to making a single change rather than changing two or three things at once.

Triple and Quad Play bundles may not be the most heavily purchased packages yet. But they are destined to remain the lead offers. Carrier need to drive higher average revenue per user and cement customers in place will take care of that.

Friday, April 20, 2007

Business Broadband is a Big Deal

If we read these forecasts correctly, wired broadband access sold to business customers, not including voice, represents almost the same amount of revenue as all wireless services do in 2011. This forecast doesn't include voice revenues. Of course, we'd also note that the relative importance of wireless is growing.

Words to Live By

Asked about Google's revenue per employee, Google CEO Eric Schmidt says the company doesn't focus on it. "It is more important to focus on end user happiness," says Schmidt. If that sounds ethereal, it isn't. The media business always is based on some equivalent of "aggregating eyeballs." So Google's business depends on attracting engaged users. "If we could bring out a product that will cause people to use Google and its various applications that much more and they spend more and more of their day using Google services, that allows us to eventually monetize that," Schmidt says.

Thursday, April 19, 2007

Will Users Pay for Features?

Alec Saunders and David Beckemeyer are consistently worth listening to. This from David, who asks really good questions:

Fring is technically impressive, but I'm still wondering about its utility

I have mentioned Fring a few times before. The most recent post left it that I had not been able to complete the setup because I never received the SMS from Fring on my phone.

I sat down with Boaz Zilberman of Fring at VON and he was able to solve whatever glitch was happening at Fring that was preventing the SMS and I was able to get Fring 2.0 installed on my phone.

Luca Filigheddu calls Fring "the most complete multi-protocol IM VOIP client for mobile phones" and I would have to agree. That said, I still find myself asking, is it useful?

Like many other cell phone users in the US, I have GPRS data service rather than a true 3G data service with my carrier. My first experiences with Fring over GPRS were not very good. More recently, I have had much more acceptable call quality on Fring GPRS-based calls. It probably depends a great deal on signal strength - while one may be able to make a standard GSM call on a weak signal, it doesn't look like one has any chance of doing a GPRS Fring call unless the GPRS signal is very strong.

This is understandable, at least to anybody that knows the technology. I am amazed that Fring works at all over GPRS and the fact that it's possible to have a decent quality call using it is an amazing technical achievement by the Fring folks.

The entire Fring application is really well done, clean, and slick, also a nifty technical achievement.

At the same time, most customers don't care about technical achievements. They want to solve problems.

Fring is cool and the SIP support works with PhoneGnome so I will use it sometimes, but now that I have it, including SIP support (thanks Fring!), I'm still left wondering, does it really have value, not just to me, but to casual phone users?

For US calls, I already stay within my minutes so there is no cost savings opportunity to place the call via VoIP and, therefore, dialing the old-fashioned way is both more convenient and more reliable for those calls. That reliability factor is a big one, as echoed by many comments to an earlier post on the subject. Perhaps consistent is a better word. Unless I'm calling another VoIP freak, the risk of the call not working isn't worth the benefit (what benefit again?) in most cases. The situation may be different for others, say those outside the US without such a minute bundle model, or if I were making a lot of international calls. Even if that were the case, however, it would still depend on the cost of my data plan. If I'm on a data plan that charges by the Kilobyte, a VoIP call could well cost more than a GSM call. I can already make single-stage international calls using national minutes with a free phone application and my PhoneGnome (or two-stage calls with something like if it comes back on-line).

If I'm roaming, this is even worse (I think). Roaming fees are so complicated I'm in constant fear of accidentilly using the data channel when traveling. I always shut down any apps that use the data channel (including Fring) due to this concern. So if I'm outside my service, say in Europe, there's no way I'm going to gamble with the mobile data roaming fees and use Fring (again, the VoIP call over the data channel costs more than the same call over the voice channel). The exception would be Wi-fi, assuming I can find a cheap enough hotspot and I have a dual-mode phone (and can figure out how to work it, see this post on theN80i.

That brings up an interesting question. If a VoIP call does cost more than a plain GSM call, are some people actually willing to pay MORE to place a Skype or Fring call because of an added benefit, in particular, presence? I'm not a big Skype user myself (I'm one of those that just never had a good experience using it) and I seldom find my Fring buddies online, so I have not yet seen this to be a big advantage fo rme. However, I can see it being something to look into. That would be an interesting case. So how about it? We've always thought of VoIP as a way to save money, but might you get so much value out of knowing the party is there to take your call that you would actually PAY MORE to place a Skype or Fring call (because of the mobile data rates) because of that added value?

I know in my case, I'm more likely to place a call on my cell using VoIP to access an added capability (say like the call recording feature of PhoneGnome) than I am to use VoIP on the mobile just to save money.

Wednesday, April 18, 2007

BT to Expose Itself

Project Web21C BETA software developer kit will expose network capabilities to developers working in the .NET Visual Studio, Java, PHP and Python environments. Initially the thinking seems to be to provide developers a way to add communications and global positioning satellite features to applications. The Web21C SDK abstracts the services interface and serialization classes by providing the developer with a simple object model to interact with.

The Web21C SDK provides the ability to embed Short Message Service into an application, for example. It also allows applications to make phone calls, conference calls, presence information, authentication, a way to store and retrieve data about an individual and location information.

A somewhat parallel effort, the BT Applications Marketplace, aims to give developers a way to market apps to the BT customer base.

BlackBerry Outage Disrupts Enterprise Ops

In a webinar poll conducted April 18 by ProfitIine, 81 percent of responding large enterprise IT and telecom professionals reported disruption to operations from the BlackBerry outage. Some 44.5 percent reported "moderate or substantial" impact to enterprise productivity. Only 18.2 percent reported no impact from the outage.

Engagement Might be The Issue

A recent Forrester Research survey suggests that mobile data apps are moving into the mainstream. More than one-third of mobile subscribers use text messaging, and 18 percent send or receive picture messages, but adoption of the mobile Internet lags, with only 11 percent using it.

As you might expect, data users are not only younger, but their attitudes also expose a deeper engagement with their mobile phone and service, and they are more satisfied with all aspects of their mobile experience than are those who only use voice.

Which raises an issue: even as wireline providers are able to leverage IP to provide richer directory and call log features, as well as click to call, will those new attributes put a brake on user engagement with their mobiles?

Certainly Embarq believes that offering wireline call logs, directory services and click to call are going to enhance the value of wireline voice, says Bill Blessing, Embarq SVP. He's undoubtedly right about that.

The issue is that end user involvement with their mobiles seems to be increasing. Mobiles are personal. Landlines are tethered to places. Mobiles inherently are "mine." Landlines are "ours" or "yours." You might use a landline. It is not "you."

Don't Have It, Don't Want It

Some 29 percent of U.S. homes do not buy any form of Internet access, and 44 percent of the "resisters" says they don't buy service because they are not interested in anything on the Internet. About 22 percent say they don't buy because they do not own a PC. The 31 million U.S. Internet "resister" homes also say they don't plan to buy access for the next year either, says a Parks Associates study. Parks researchers also find that most new broadband access subscriptions are coming from dial-up customers who are upgrading, not "newbies."

MetroPCS: More Evidence Voice is Not a Commodity

MetroPCS provides more evidence that even mass market mobile phone service is not a commodity, in the strict sense. MetroPCS offers flat rate local and domestic U.S. calling in Miami, Tampa, Sarasota, Atlanta, San Francisco, Dallas, Detroit and the Sacramento metropolitan areas to more than three million customers at the moment.

It might be said to specialize in a several market segments: people who want flat rate wireline pricing plus mobility; people who have problems qualifying for prepaid plans; immigrant communities; people who don't like contracts; people who don't like credit checks or deposits; younger users and first time users.

MetroPCS offers a $30 per month service plan offering unlimited calling. For an additional $5 to $20 per month, ssubscribers can add nationwide long distance calling, unlimited text messaging (domestic and international), voicemail, caller ID, call waiting, picture and multimedia messaging, mobile Internet browsing, push e-mail, data and other a la carte options on a prepaid basis.

The company's most-popular service plans are the unlimited $40 and $45 rate plans which offer unlimited local and long distance calling, text and picture messaging, enhanced voice mail, caller ID, call waiting and 3-way calling. Those plans are purchased by more than 85 percent of MetroPCS customers.

On February 22, 2007 the company introduced a new $50 service plan which includes unlimited mobile Internet browsing and push e-mail in addition to the services included in our $45 service plan.

MetroPCS customers in all metropolitan areas averaged approximately 2,000 minutes of use per month, compared to approximately 875 minutes per month for customers of the national wireless carriers. Average usage at thsoe levels suggests that a substantial number of customers use MetroPCS as their primary telecommunications service. Approximately 65 percent are first time wireless users.

Though cable and tier one telecom providers clearly have bet their futures on triple and quadruple play strategies, MetroPCS (and Leap Wireless) show that a targeted wireless pure play is possible, if a provider is willing to segment. And note that the company's average revenue per user does not appear to different than that of the market leading companies.

Talking, generally considered to be a commodity, does not appear to be such a thing if one looks at the matter closely.

Satellite Gains at Cable's Expense?

According to a survey taken early to mid March, there's evidence some households are about to make a move to satellite TV, especially DirecTV. While Comcast remains the current leader among U.S. and Canadian TV service providers, DirecTV shows the most market share momentum, says the Changewave Alliance, after a survey of nearly 3700 members.

And though customer satisfaction does not reliably translate into loyalty, it appears that satellite video services rank well on that score. Satellite customers say they are much more satisfied than cable customers. "Moreover, Satellite satisfaction ratings have improved four points since our previous survey, while cable satisfaction rates have declined two points, Changewave says.

DirecTV now is the industry leader in terms of customer satisfaction and has also experienced the biggest improvement since November. Comcast has experienced the biggest decline.

Most significantly, satellite s about to gain at cable's expense, Changewave says. "A total of 13 percent of our survey respondents say they plan to switch providers in the next six months and nearly half of these (48 percent) say they’ll switch to satellite.

Tuesday, April 17, 2007

Amazon: Compute in the Cloud

Amazon's Simple Storage Service (S3) and Elastic Compute Cloud (EC2) appear to be getting traction. The whole idea is to provide easy to use computing and storage "in the cloud." S3 recently had a peak day with 921 million requests, says Jeff Bezos, CEO of Amazon. At the peak second for the service, there were 16,600 requests. A year ago Amazon had 800,000 "objects" on the service. Now there are over five billion. S3 and EC2 are just a couple of reasons why the pace of Web application development has gotten so blistering.

Time Warner Cable Heading for the Doors?

When a major player in the content business starts thinking that maybe it doesn't need to control distribution to the extent it once did, watch out. It is an indication that the strategic value of distribution networks could be changing. That might be just what is happening at Time Warner, which has generated significant profits from its cable system ownership. The latest thinking is but the latest iteration of a constant theme in the video entertainment business: the relative strategic value of distribution and content assets. Though the mantra of late has been that "content is king," distribution always plays an important role. Sometimes it is the key role. Satellite radio wouldn't be much without the creation of new distribution networks. But movie studios are barred by law from owning theater chains.

Once upon a time a company had to build an operate its own network to deliver voice services. And cable TV wouldn't exist without the cable network. And the same might have been said for the terrestrial TV and radio businesses as well. But there are other media models that show how content businesses can flourish without any ownership of distribution networks. Newspapers and magazines provide a prime example. Grocery stores, kiosks and the postal service provide distribution.

Senior executives at Time Warner are considering whether the media company should substantially reduce its cable holdings over time, says Wall Street Journal reporter Matthew Karnitschnig.

Cable has been a core part of the company and its precursors for decades and is now the biggest contributor to profits. But the long-term future of cable, as the Internet emerges as a viable venue for watching TV, is murky, says Kartnitschnig. Some within Time Warner wonder whether the company wouldn't be better off if it were to get out of cable and double down on the Web, where it already owns AOL.

Getting rid of a big chunk of its cable holdings would transform the nature of Time Warner, making it more reliant on its role as a provider of filmed entertainment and print and Web content. For years, Time Warner has believed in wedding its movies and television programs to powerful distribution networks, primarily its cable operation, as a way to ensure that their content wouldn't be blocked by rivals. But with the Internet increasingly serving as a home for TV and film offerings, content companies may feel they no longer need to control old-style distribution networks such as cable or satellite TV.

The issue will be put before the board at a meeting next month, part of an annual strategic review, say people familiar with the situation. Time Warner management will present several alternatives for future ownership of Time Warner Cable.

The fact that Time Warner is even willing to think about a major reduction of its cable holdings is a sign of how much attitudes toward the cable industry are shifting. Despite cable's recent streak on Wall Street and its success in attracting customers to its bundled offering of Internet, telephone and television service, this is a business some analysts believe will become increasingly commoditized, squeezing profit margins.

News Corp. already has sold its stake in DirecTV Group Inc. to Liberty Media Corp., which continues to believe in the value of distribution networks.

The obvious issue for telecommunications companies active in the access market is precisely this issue of the strategic value of video entertainment, and the effort and expense that requires. One might argue that telcos are getting into a mature business just as key players are getting out. On the other hand, one might also argue that telcos will share immediately in a signficant chunk of the walled garden video business, but would have to create a new role in the as yet unproven Web video market, where control of distribution, by definition, isn't a key strategic imperative.

Monday, April 16, 2007

What Else Would Vonage Say?

Vonage says it has no "workaround" in hand to sidestep Verizon's patented Internet phone technology. That would simply stand to reason. It obviously would take time to circumvent a broad patent covering interconnection of public and IP networks.

This is precisely what one would argue if angling for a permanent stay of an order that would shut one's company down, while an appeal winds its way through the courts.

More to the point, though, Vonage says isn't sure that such a plan is even "feasible," given the expansiveness of Verizon's patents, which set out methods for passing calls between the Web and conventional phone networks. Friday the 13th, indeed.

A federal court recently ruled that Vonage had infringed on Verizon's patented technology. As punishment, Vonage was barred from using the disputed technology to support new customers. Vonage has gotten a temporary stay, but has petitioned for a permanent stay until the appeals process is finished.

Vonage told investors and customers not to worry because a "workaround" was in development. That does not necessarily contradict the fact that "Vonage currently has no workarounds that moot the need for a stay."

"While Vonage has studied methods for designing around the patents, removal of the allegedly infringing technology, if even feasible, could take many months to fully study and implement," Vonage has said in a document filed with a federal court, USA Today reporter Leslie Cauley says.

We wouldn't think the filing necessarily reveals much, other than the strongest-possible argument to a judge that a permanent stay is urgently needed.

IPTV: Tough Going in Western Europe

It's a good thing U.S. consumers like television quite a lot. Because IPTV results so far from Western Europe are sobering. While 11 Western European incumbent telcos have launched IPTV services, Forrester Research’s says consumer interest remains low, and revenue potential remains modest. Forrester predicts 25 percent of European xDSL/fiber broadband subscribers will have IPTV within 10 years. In the U.K. market Forrester expects 13 percent penetration in a decade. In France, Forrester expects 33 percent penetration in year 10.

Lars Godell, Forrester Research principal analyst says “Europeans are generally unwilling to pay much for TV content, and a discount scheme is needed to entice them to buy triple play."

In a mature TV market, this means incumbents will need to price IPTV below competing cable and satellite TV services. Assuming the typical provider gets a third of the market, annual IPTV revenue will work out to about €11.24 in net annual IPTV revenues. Remember that 50 percent or more of the actual gross retail value has to be given directly to the content owners and packagers.

At the end of June 2006, Belgacom, FT, and Telefónica had only achieved 1.7 percent, 1.2 percent and 1.8 percent IPTV household penetration, respectively. Telefónica has been the most successful in tapping into its retail broadband subscriber base, with 8.3 percent IPTV penetration among broadband customers.

DT wants to get to one million IPTV subscribers, representing 2.5 percent of German households, by the end of 2007.

Forrester estimates that IPTV investments will generate a cumulative €3,742 in losses for an average broadband subscriber over a 10-year period.

That is not to say telcos should nix the construction of fiber deep access networks or entering the video entertainment market. It is simply to point out that such efforts are fundamentally strategic matters, not revenue generators per se.

4G Has to be Taken Into Consideration....

One thing about the access business. It isn't as though the cable and telco contestants can rivet their attention on each other, and ignore everybody else. 4G wireless, for example, sometimes is defined as an access featuring 1 Gbps for stationary users and 100 Mbps to mobile users. The cable industry's DOCSIS 3.0 specification, for example, will bond channels to provide downstream speeds up to 120 Mbps and upstream bandwidth in the neighborhood of 80 Mpbs, at least in the lab. In the real world, physical impairments of various types and the need to share that bandwidth across a base of users will, in practice, reduce the actual bandwidth any single user might be able to pay for. We would note that at least one U.S. telco, SureWest Communications, offers a 50 Mbps symmetrical bandwidth service today for any customer that will purchase SureWest's most-expensive bundle, including every video service, wireless, fixed line voice and Internet access.

Thursday, April 12, 2007

"Why Vonage?" Jon Arnold Wants to Know...

Bloggers Jon Arnold and Daniel Berninger want to know why Verizon went after Vonage on the patent front. Why not some other company? The answer is that the dominant telcos want some competition, but not effective competition. The reason is simple enough. It is quite beneficial to show regulators that there is effective competition in their markets. But what happens is that there's a threshold. Below a certain level of success, we leave you alone. Cross the line, and we have to deal with you.

That's why some competitive local exchange carriers actually were encouraged to take share away from certain large tier one incumbent telcos. Helped, actually. All to demonstrate that there is effective competition in the market. Not every CLEC got that sort of material help. And not every CLEC found itself so favored once the legislative and regulatory battles requiring proof of effective competition drew to an end.

Vonage gets attacked because it frankly doesn't help to attack SunRocket or Packet8. Vonage is the one company that crossed the threshold, as all the leading cable companies have done. And that is my take on "why Vonage?".

Vonage Starts Cutting

Vonage says its quarterly results for the period ended March 31, 2007 will show $195 million revenue, 332,000 gross customer adds and 166,000 net adds. That would bring Vonage in flat with net adds for the fourth quarter of 2006, when it added 166,000 net customers.

Marketing cost for each gross customer addition, though, backed down to $275, towards the more historic range of $239 in the second quarter of 2006, $306 in the fourth quarter 2006, $254 in the third quarter and $239 in the second quarter last year.

Quarterly revenue of $195 million was stronger than the $180 million Vonage reported for the fourth quarter 2006. Monthly ARPU was $28.17.

But Vonage also expects to boost operating results by cutting $110 million in marketing expense, possibly a quarter of what it originally though it would spend this year. Vonage now expects to spend $310 million for 2007 marketing, instead of $400 million to $425 million.

A 10 percent force reduction also will slash SG&A costs of about $20 million in 2007. Planned cuts in other SG&A expenses are expected to generate an additional $10 million in savings.

Collectively, the moves will get Vonage very close to positive operating income, though not profitability.

Wednesday, April 11, 2007

Carriers Innovate Because They Have To

I wasn't the only one at the Voice Peering Forum recently who was struck by the sudden lead some European telcos have taken in their transformation efforts. BT actually is growing customer counts and revenue in its tough mass markets segment, for example. To be sure, some of the progress is born of necessity. As Carlos Dasilva, France Telecom Americas region marketing director notes, "we had to move aggressively because the regulators are killing our business." And though she didn't specifically make the same point, BT has had to strike out on some very innovative paths precisely because it was forced to do so. But a significant turn in the direction of flexibility (an internal requirement, perhaps) and openness (more important for third party application providers) is going to pay dividends for end users, who "aren’t waiting" for regulators to set rules and service providers to start giving them what they want, Anna Boukovskaia, BT head of market development, said.

Which isn't to say regulatory action is inconsequential. Quite to the contrary, regulatory ground rules always always always create the preconditions for all revenue generating activities in the public and private network spaces. Deutsche Telekom and Telstra, for example, find regulatory demands so onerous they simply have refused to build new optical networks, because they aren't sure they will earn a return on the investments. Credit aggressive wholesale requirements for the concern.

Paradoxically, hammering by regulators is largely responsible for the innovation now being shown by the likes of BT and France Telecom (Orange). But the changes come at a serious price. France Telecom is laying off 20,000 people. If you know France, you know how unusual that is, and how powerful the need for change therefore is. Keep in mind there are multiple forces at work here.

Regulators, technology and capital markets normally work in tandem to create markets. They also can work in tandem to change them. What less often occurs is that end users change the markets. But that is precisely what is happening now.

To be sure, the legacy markets were going to change, in any case, because of regulatory shifts, technology advances and capital availability. What is highly unusual is the impact actual consumer preferences now are having. Text messaging was an accidental success. Nobody really claims to have "always believed" that short message service would be such a big revenue driver. Carriers and service providers did not create this market: end users did. So Boukovskaia flatly says "we don't know what the next killer app is going to be."

Notable is BT’s commitment to take all voice and data services at the edge and deal with everything as IP and Ethernet. Every voice line is converted to VoIP right where the copper pair is terminated. All 30 million of them. DSL services are provided from the same linecard. There’s no separate DSLAM, POTS termination, SONET/SDH Add Drop Mux.

Fractional TDM based Frame Relay and IP services are packetized and bundled right at the POP. If it isn’t TDM leased line (E1 or bigger), it gets packetized and sent through the core using MPLS.

A dramatically simplified network results.

Going forward, TDM as an enterprise access technology is over in the United Kingdom, at least as far as BT is concerned. BT embeds the VoIP functionality as close to the customer as possible. This has the effect of reducing network elements.

The Tyranny of Choice

If you have used an iPod shuffle or a Bose audio system recently, you might notice something: these are mimalist devices. The shuffle has no screen. You can turn it on or off, play songs in order or randomly shuffle, raise or lower the volume, go forward or back one song. Out of the box, the shuffle doesn't even have a transformer. You recharge by using a PC's USB port.

The Bose docking station, which provides amplification for iPods, allows you just a couple functions. You can turn the unit on or off. You can raise or lower the volume. If you use the remote, you can move forwards or backwards in your song menu. You can mute the audio. Though it initially is jarring, the Bose doesn not even have bass and treble controls, because it senses the acoustical properties of the room and adjusts all that for you.

So in a world where we assume the customer wants choice, how does that make sense? The flip side to choice is that too much choice is a problem. Too many options actually decrease satisfaction.

The obvious implication is that service providers habe choices to make. They have to identify the key things users want, then simplify features enough to satisfy them, while minimizing the total number of features available to users.

As much as many of us stress open platforms, because it leads to innovation, innovation also has to be harnessed to simplicity. Apple gets it. Almost nobody else ever does.

In his book The Paradox Of Choice, professor Barry Schwartz notes that a supermarket offers 285 varieties of cookies, 85 flavors and brands of juices, and 95 varieties of chips, 230 soup offerings, 120 different pasta sauces, 275 varieties of cereal, and 175 types of tea bags. Supermarkets today carry more than 30,000 items, and 20,000 new products are introduced each year.

You get the point, despite all that choice, few of us do much more than return, over and over, to our trusted brands. So there is no alternative but for service providers to continue to be gatekeepers of sorts, simplifying the experience of services and products in ways that give people what they want, but shield them from making all kinds of decisions that aren't central to the core experience.

Service and experience providers will make, and must make, decisions on behalf of their customers, to improve the value of the experience. Ironically, that means limiting absolute freedom to a great extent, even as some will urge openness to an extreme. Apple isn't open. It nevertheless produces products and services users love. So the issue is how well any particular provider really understands what people want.

In some real sense, the attitude of openness to innovation, which is a good thing, also covers a fundamental lack of understanding about what users really do want. Providers don't know. So openness is a good thing. But once needs are discovered, serious pruning has to be done.

It's a paradox, but that is what Apple does so well.

What's the Incremental Cost of Terminating a Minute?

Well over a decade ago, as part of an exercise to determine the actual incremental cost of terminating a minute of voice usage, I calculated that incremental cost could not be less than three cents a minute. The reason? Any service provider terminating a minute of long distance traffic, for example, would have to pay an access fee, and then there's the cost of the billing infrastructure to send a bill or comply with government regulations, which would add some fraction of a cent per minute.

It doesn't appear those costs have changed much, at least for most rural telephone companies. The cost to originate, by the way, seems to remain at about one cent a minute, with the actual usage of a switch costing about 4/10 of a cent, one analyst who continues to run cost studies reports.

Embarq SVP Bill Blessing, additionly, says that the cost of operating a soft switch is in fact not less than operating a legacy Class 5 device. Transport, access and plain old overhead continue to be where the cost drivers remain, not switches.

Mobile Data ARPU Inches Up

IDC research, there were 236 million U.S. wireless subscribers by the end of 2006. U.S. wireless data revenue totaled $4.8 billion for the fourth quarter of 2006, representing roughly 13.5 percent of mobile provider average revenue per unit, or $6.74 per subscriber per month.

Of the total data revenue, 48.8 percent came from messaging, 13 percent from content and simple application downloads and 38.2 percent from other business- and consumer-oriented services and content.

"Our research shows that in terms of blended data ARPU, Sprint Nextel, at $8.32, regained its lead over Verizon, now at $7.91, although Verizon remains the leader in terms of total wireless data revenue and data percentage of ARPU among the U.S. national carriers," says Julien Blin, IDC research analyst.

One way to look at the data is that basic communications remain the driver, though content sales are growing.

FMC Not a Slam Dunk

Bad news for fixed mobile supporters: In March 2007, Deutsche Telekom cancelled T-One, its dual-mode WiFi-GSM service in Germany, which it had launched in August 2006. Whatever else the shutdown might mean, it certainly indicates that service providers cannot simply put the service out there, make pricing and handset mistakes, and expect customers to go wild over it.

That’s especially true if there is competent competition. T-One was up against the cheaper T-Mobile home zone services, for one thing. Home zone services are based on tarriffs that encourage use of fixed network connections rather than mobility network when a user is within range of their identified home zone transmitter.

So why did DT’s T-One fail? It failed because it never managed to get enough customers. At the point the service was closed, DT had garnered far fewer than 10,000 customers. In fact, just 2,000 was the final figure, says TeleGeography.

The more important questions are why it failed to stir much customer interest. Observers point to high prices, really limited handset availability, competition from T-Mobile and basic lack of a compelling value relationship. Orange seems to be faring better, but results from other markets suggest the fixed mobile convergence value proposition still isn't broadly embraced.

Maybe all people want is cheaper calling and better reception when inside the home. Service providers can satisfy the first desire by a simple change of billing. The second requires some degree of technology integration. Beyond better reception and cheaper calling, it isn't so clear that lots of people want to converge phone numbers, features and services, beyond directory services.

Maybe all most people want is simply to use their mobile service more places, with acceptable quality, than they now can. Lower prices might also be an issue, but one might suggest users would prefer better coverage even to better prices.

When Better Broadband Might Not Help

The Wisconsin Economic Development Corporation, in detailing the impact of the Covid-19 pandemic on various sectors of the Wisconsin economy...