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.