Good News, Bad News

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

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

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

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

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

Different Platforms, Same Problem

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

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

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

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

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

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

Consumers Confused, Long Tail Reigns

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

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

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

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

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

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

BT Sharply Reduces Reliance on Voice Revenue

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

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

VoIP Audio Quality is Better, says Minacom (Tektronix)

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

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

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

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

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

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

Wireless, Not Skype, Cannibalizes Wireline Voice

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

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

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