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 AllFreeCalls.net 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.

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.

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.

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.

"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.

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.