Tuesday, October 21, 2008

Bad Times, Good Times...

I remember reading somewhere (though I am not able to find the reference now, not even with the help of Google!) that usage of telecom networks goes up significantly during periods of economic crisis. While it might appear counter-intuitive -- why would consumers or businesses spend more during bad times -- there is a very simple social behavior aspect that can explain this phenomenon. Communication helps create a security blanket.

Periods of uncertainty, particularly economic slow-downs that can be spread over months and years, cause us to seek comfort in family and friends. Partly to keep track of what is happening with our loved ones and partly to gain confidence from the social network. Such times are also periods of less and erratic work, thus, providing more opportunities to share and bond. Given that our friends and family might be spread across locations and travel costs are reasonably prohibitive, telecom is the most appropriate way to stay in touch. With improved technologies that enable photo and video sharing and various other ways of 'networking', it will not be surprising if we find that the current economic crisis encourages more spending (of time, at least) on mobile phones and social networking sites.

Does this really mean that it would be good times for all telecom companies? Obviously, no. Consumers are unlikely to be willing to spend much more on telecom services than they did normally. In fact, one can expect greater discount-seeking behavior. It would take the form of shifting to unlimited packages or signing up for 'friends & family' schemes. Economy plans, even of lower quality, would become acceptable. Mobile operators should
consider creating packages that encourage group calling or conferencing and data sharing, like photos and video clips (MMS). ISPs or alternate operators could drive the usage of VoIP or Internet Telephony services, particularly for long distance calling. There would also be opportunities to innovate with personal video calling and conferencing services. Such services can also be used to drive increased adoption of Internet services amongst unaddressed segments like senior citizens. 

The recession in several developed markets and slow-down across the world offers  communications companies an opportunity to influence and support our psychological need to stay connected during bad times. Service providers can strengthen their relationship / engagement with consumers by becoming an integral part of their social lives. As a result they can also try to recession-proof their business models. 

ps.    If you have come across any research or evidence to support or dispute the above hypothesis, I would be interested in hearing from you.

pps.    Apparently there is some other research that proves that the need for family bonding (and perhaps, the spare time) during economic crises also results in a spurt in baby births. Interesting as the thought is, I guess some other forum can do more justice to that aspect of bad times, good times...

Tuesday, October 14, 2008

Game-changing Devices

The battle for the consumer's mind has never been more intense. The balance of power between the three major segments of the communications world is rapidly shifting and it is difficult to predict winners. 

Telecom service providers, handset & device manufacturers and the content / software companies are all vying for customer ownership. Only one thing is for sure - telecom companies that had a traditional edge in this battle because of their ongoing / recurring commercial relationship with the customer are now losing out.

I will use the example of the iPhone and my recent experiences to illustrate the point in this post. 

The mobile operator typically had the strongest relationship with a mobile subscriber. From choice of device to service provisioning to customer service to billing, the telco was always the primary face of the mobile service. In the few cases that the customer used any mobile content or data service, the operator would channel the services through its portal. 

In some markets, however, the choice of device was mostly with the customer. So handset manufacturers would try and attract users to their latest models with accessories that usually had no connection with the mobile service. FM radio, Bluetooth and external memory were actually making the phones more than just phones, and in a way, taking away revenues from the mobile operator. But the handset vendor had limited ongoing relationship with the customer -- perhaps once in 12 to 18 months when the device came up for replacement. 

By controlling the content / services portal and with its ongoing billing relationship, the mobile operator dominated the customer relationship. The user had limited choice in what more she could do with the phone, except by changing the device or the service or both -- but we all know how expensive and difficult that is.  

For the first time (almost), the iPhone has tilted the balance of power significantly away from the telco. The phone hardware has some exciting features but not exclusive. Similarly, the user interface is extremely intuitive but lacks some basic features. But the killer app is its App Store. With thousands of third-party applications in the store, many being added daily, Apple now dominates the customer relationship. 

The mobile operator is just the (wireless) pipe provider. 

I have been a subscriber of Vodafone (earlier Orange and Hutch) in India for nearly eight years. I have admired their capability to innovate and create interesting applications / services. However, for the last six weeks since they launched the iPhone, they have lost my attention. I have downloaded nearly fifty applications which are the center of my attention (when I have the time to spare). True, many of them use the Internet and therefore, I do continue to provide Vodafone with a revenue opportunity for the EDGE/GPRS access, but that's dumb pipe. 

Vodafone could have used its 'relationship' with Apple to create unique services that would have combined the strengths of the services platform and network access - to do something that an ordinary third-party developed cannot. But it has not done so. Like most other operators that have launched the iPhone. Today, they are hoping that their (near) exclusive commercial relationships with Apple will tide them through. They are mistaken.

Mobile operators would do well to learn from the Broadband experience. In most cases, the Broadband operators have become dumb pipe providers; Google, Facebook and others  dominate the customer engagement online. The traditional telco response to such situations is to flex their (monopoly) muscles and choke access speeds, thwarted either by regulation or user pressure. Yet, there are also a few Broadband providers that have managed to fight back and create services like IPTV that rely to a large extent on network capabilities. 

Let me go out on a limb here and make a prediction. The likely winners in this battle will be the guys with the services platforms that pour life into the dumb pipes and nearly dumb devices.

Sunday, October 12, 2008

Coping with Data Demand created by Web 2.0

So, how is the telecom industry reacting to the exponential growth in bandwidth demand, what are some of their strategies to remain relevant and succeed in this New World?

Firstly, telcos are doing what they like best - building infrastructure.

There is a significant activity globally, in new submarine cables and lighting up more capacity on existing cables... as one would expect, a large part of this activity is 'centred' around the emerging markets regions of Asia, Middle East and Africa. At last count, over $5 Billion was being sunk in the water, to build these cables.

While this does bring back the scare of the excesses of ten years ago, there are three big differences this time around: one, bandwidth demand growth is now for real and not based on some projected dot com boom; two, most of the investments are directed towards emerging markets which have traditionally been under-supplied with international infrastructure, and three, a large number of the projects are being driven by experienced telcos that have strong organic traffic to support these investments. 

But it is not sufficient to just strengthen backbone networks; the biggest challenge is at the Access level.

There is huge mismatch between existing access networks and the networks that are required in this new world. Broadband networks in developed markets were built for the first wave of Web, assuming low contention ratios. In a text environment, you would download a page and read it for a few minutes before the next hit. Those calculations go completely wrong when large numbers are watching a live broadcast - say, of a cricket match on the net.

It is estimated that $500 Billion to $1 Trillion would be required to build out the fiber and IP networks reqiured to support the emerging demand. Many countries like Hong Kong, Singapore and the US are working towards 100Mb networks to the home.

Of course, in the Indian context, that would be a pipe-dream. Over the next 5 years, most of us should be thrilled if we got a reliable 1Mbps to our homes. Wireless technologies like Wimax will play an important role in most of the emerging markets' broadband enablement.

From a telco perspective, even this is not sufficient. As the content and applications dominate the consumer experience, telcos are slowly losing their relevance from a customer ownership perspective. The Web 2.0 companies would love to relegate the telcos to being dumb pipe providers.

Many of the telcos are therefore moving to a bundling model, with IP services riding on top of the access. It is not clear whether this model will work - the telcos' earlier walled garden models have mostly failed. The telco challenge is that most of them are not prepared -- genetically --
to shift to a services mindset. Some of them have even tried the blocking tactic, trying to discriminate some sites against the others - choking speeds when users access specific sites and freeing it up, for their own content, for example. This is the heart of the Net Neutrality debate in the US. The content companies have won the initial rounds in this battle.

Infrastructure versus Innovation... it is tough to predict who will win.

A similar, but less bloody battle is also emerging between the telcos and IT companies. Most Telcos are moving to an "ICT" strategy, where they are combining services with network, particularly managed services like hosting, security and collaboration. The IT companies have also been moving towards these services from their traditional IT maintenance and outsorucing models.

It is likely that telcos will have an upper hand in services that are network or cloud based - Telepresence, CDN and security, for instance. They are also, in many cases, seeking to collaborate with the IT companies in addressing end to end demands of business customers.

Finally, a word about the economic implications of these developments. We are seeing a virtuous cycle where availability of new applications drives demand for more bandwidth and attracts new subscribers. The resulting growth in revenues is ploughed back into network and capacity enhancement, which in turn encourages new, higher-end applications.

We have seen this happen in the mobile space in India and other emerging markets, and are begining to see the initial signs for the broadband market. It is interesting to note that the developed markets have a slightly different challenge. Web 2.0 is creating the demand for bandwidth, but not many new users, since the markets are getting saturated. Since, most of the existing users are on fixed unlimted packages, they are consuming more bandwidth without any growth in revenues. The fall-out is lower investments and possible future shortage in capacity - already several broadband companies in the US are putting download caps for their users to overcome this challenge.

In conclusion, 300 million broadband homes and most businesses are increasigly using Web 2.0, as part of their daily lives, creating a huge demand for bandwidth. Telcos will need to invest more than $500 Billion in network and capacity enhancements, and more importantly, they will have to radically change their business models to succeed in this New World.

Friday, October 10, 2008

Entertainment and Web 2.0 - The New World

About 15 years ago, the Time Magazine carried a cover story about "The Strange New World of the Internet"- well, we can now say that we are in this New World.

A world where three distinct forces are impacting us: globalization, the ascendance of China and India, and Web 2.0. 

It is a new world, where boundaries both economic and cultural ­ are coming crashing down; where emerging markets have materialized as strategy drivers for most corporations; and, where communication has become as it ought to be ­ one-on-one and interactive.

While there is a lot to be said about the first two forces, this post will focus on the impact that Web 2.0 is having, on consumers and businesses. A follow-up post will discuss the implications for the telecom sector.

When the telephone was introduced, it took this great invention nearly 100 years to become popularly adopted. The cell-phone fared much better, in only 20 years it was available in more than 80% of the world. And then, shift to 2005, a new service was launched which in less than 2 years had become the leading service in its class, available worldwide.

Yes, we are talking about YouTube that has put the power to express and share in our hands. Today, everyone has the chance to become a star, take Judson whose 6 minute dance video is one of the most widely watched performances ever with over 100 million views in 30 months! YouTube serves up hundreds of millions of videos daily making it one of the largest media companies in the world. The other similar phenomenon is iTunes which has become the   world's largest diistributor of music -- ahead of traditional retailers like Walmart -- having sold 5 billion songs in the last few years. It is now trying to repeat the performance with Movies - nearly 50,000 movies are rented or sold on iTunes everyday.

Undoubtedly, the media industry is in the midst of a major re-alignment.

If iTunes, YouTube and other such sites have changed the way we create, share and consume content, sites like Facebook and Orkut are changing our social behaviour. There is empirical evidence that large numbers of young people have more friends online than otherwise, and surely, they are more comfortable "hanging out" - chatting, sharing photos and videos and playing games with their online contacts than say, playing galli cricket!

These interactive platforms and capabilities are also creating other new applications like E-learning and Digital-cinema. I personally believe that Education can be transformed by the capabilities of Web 2.0: why can't we move to a world where all people have access to good quality education, in an interactive manner, independent of geography and time-zone? What an Idea! 

The spread of the Web 2.0 phenomenon is assisted by the availability of new access devices that have challenged the computer's dominance as the Internet access device. Whether it is the iPhone or the G-phone, gaming devices like Wii or Xbox, book readers from Sony or Amazon and VoIP phones, new exciting applications are being enabled through more appropriate end-equipment.  This is particularly relevant that we now have new segments of users, young and old, and from emerging markets that are now beginning to access and discover the power of the Web.

Already, Broadband is reasonably well distributed across the world: AsiaPac contributes nearly 40% of the 300Mn broadband homes and is expected to drive large part of future growth. 
We are also seeing the development of strong revenue models to support Web2.0 - consumers are showing a willingness to pay for the content they consume and as they continue to substitute their media & content spend from the physical world, one can expect online paid content market to grow rapidly.

While the visible face of Web2.0 is in consumer applications of music, video and social networking, businesses are also adopting the power of these technologies to improve how the communicate and collaborate -- amongst themselves and with external stakeholders, like customers, partners and employees. This could be in the form of marketing,  training,  recruitment, market research, etc. Particularly in an environment where there is considerable pressure on corporates to contain operating costs, the Web can provide very effective business tools at unbelievably low costs.

And if consumers and businesses adopt Web 2.0, can politicians be left behind?

It is believed that campaigning using the Web and SMS will play a decisive role in this year's US Presidential elections, taking the messages to voters in a highly customized, interactive and personal manner. Even in India, politicians have begun using these technologies to reach out to the 'so-called middle class' that traditionally stays away from political activities and would never attend a political rally.

So, what does all this do to the data traffic on the Internet? Already, it is believed that video-based traffic constitutes over 50% of all bandwidth consumption. Over the next few years, nearly 80% of all traffic - on public Internet as well as private networks - would be video. This trend is clearly reflected in the growth of Internet bandwidth - 50-60% per annum globally. What is more interesting is that developing markets are catching up in most of these markets, including India, we are observing 100% per annum growth in bandwidth demand.

It is estimated that over the next decade, we will consume 100 times more bandwidth than we do today!

So, how is the telecom industry reacting to this exponential growth in demand, what are some of their strategies to remain relevant and succeed in this New World?

(This is derived from a presentation made by me at the National Telecom Seminar of the Symbiosis Institute of Telecom Management recently. Part Two of this post will follow soon. Time magazine image courtesy damclean)

Wednesday, October 8, 2008

Emerging Markets Calling...

The Indian telecom market has not only grown at a scorching pace in the last 5-6 years but also created some world-class companies that have now emerged as potential global challengers. There is now great level of excitement amongst investors, customers and bankers worldwide about the next moves of the Indian telcos. Whether it is mobile mergers or submarine cable builds or Wimax investments, India appears to be in the thick of things.


Over the next few years, growth in telephony will be driven by emerging markets in Asia, LatAm and Africa. These markets, with low teledensities, have been using wireless / mobile technologies to leapfrog several generations of telecom.  Emerging markets are also leading the growth in data and bandwidth consumption partly driven by increasing Broadband penetration but more importantly on the back of growing enterprise connectivity. These markets, typically growing 6-10% p.a., are now attracting attention from MNCs as growth or revenue opportunities, and not just as cheaper alternatives for back-office functions.  We are also seeing the rise of the new multinationals, from India, China and other rapidly developing economies, creating the reverse, outbound flow of investment. An obvious consequence of this economic activity is the need for improved cross-border communications and networking services. 

Some of the Indian telcos like Tata Communications made significant investments in global submarine cable networks at a time when most western telcos, smarting from the excesses of the previous decade, stayed away from the game. The previously under-supplied regions of Asia, including India and Middle East and Africa are now the hot-beds of cable laying activity, with Tata Communications alone involved in at least half a dozen projects simultaneously. We are also now moving up the value chain through investments in new networks (MPLS and Ethernet) and the creation of managed services like managed security, hosting and collaboration, with investments of several billions of dollars. Not only do we have the advantage of growing local businesses, we also bring with us a distinct knowledge of operating in the complex business, regulatory and policy environments of the emerging markets. As Indian companies and multi-nationals seek to build and expand their presence in this new world, they have greater comfort in partnering with those that have global capabilities but are locally superior. 

Indian telcos may have the disadvantage of a relatively small home market - the Indian enterprise market is about $5Bn in size compared to most western markets that are 4 to 20 times larger. Being small and late to market however is possibly our biggest strength. Determined to make a mark and without the burden of legacy networks and systems, we can seek to successfully take on the larger, more established and usually bureaucratic competitors. In particular, as relative new entrants, we can focus on innovation around new services capabilities and commercial models. At the same time, ownership of the core transmission and IP infrastructure provides us the ability to create distinctive network or cloud based managed services. Our managed security offerings, for instance, combine superior technology platforms with the strength of a global, Tier-1 IP network. Similarly, the ownership of a global MPLS network and a unique private plus public room business model have translated into a world-leading managed Telepresence service.

Indian telecom companies are not yet amongst the largest in the world, perhaps we will never be as large as some of the big players from the US and UK. However, in several segments and markets that have the highest growth potential in future, one can safely expect us to play a leading role. As developed markets age and slow down further, India and other emerging markets will become the center of gravity for the new world of communications. We can proudly say “hello” to that. 

(This article also appeared in the Annual issue of Communications Today in October 2008.)