Build Strategy Makes a Big Difference

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

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

Arbitrage Won't Drive VoIP Forever

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

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

Piracy Part of the Business Model?

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

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

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

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

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

Both Substitution and Augmentation

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

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

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

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

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

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

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

Metro Ethernet Getting to be a Bigger Deal

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

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

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

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

Mobility is Key for Business Unified Communications

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

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

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

Appetite for "Bundles" Varies

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

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