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Abstract
Carriers keep control of the wireless value web by controlling pinch points on the flow of value through handsets, networks and retail supply chains. This gives them power over their suppliers. They can also perform fine-grained price discrimination against users for the value that flows over the network. A move to open all-IP networks undermines this business model, and enables massive disintermediation of carrier toll systems. This paper describes the mechanics of this change, what the important value creators will be in an all-IP world, and suggests strategies and tactics for the varying market conditions along the way.
Change History
Date 7 Nov 04 22 Nov 04 3 Dec 04 10 Dec 04 18 Dec 04 Who Martin Geddes Martin Geddes Martin Geddes Martin Geddes Martin Geddes Version 0.1 0.2 0.3 0.4 0.5 Changes Document outline created. First draft. Cinderella v0.2 comments addressed. Added context diagram for the strategies; details on trust, billing, abuse; executive summary. 14 Dec conference call comments addressed
Contacts
For Telepocalypse Ltd.: Martin Geddes, Director Telepocalypse Ltd, 26/5 Annandale St., Edinburgh, EH7 4AN, UK. Skype: mgeddes Yahoo: mgeddes_uk mail@telepocalypse.net For Cinderella:
Telepocalyptic Quote
Who will be the biggest losers [from VOIP]? Not the fixed-line telcos, even though their revenues may fall by 25% by 2010 due to VOIP, according to Mr Mewawalla. The mobile operators are likely to be the big losers, with their revenues plunging by 80%. Together, VOIP and wireless broadband could fatally undermine their costly thirdgeneration (3G) networks. - The Economist, 2 December 2004
Executive summary
Cinderella is finding it harder to maintain margins and volumes in the face of consolidating and powerful wireless network operators. At the same time, wireline operators are facing significant voice service revenue loss from VoIP, and are failing to create new billable events from other newer IP applications. Technology improvements such as Wi-Fi and FLASH-OFDM suggest similar dynamics will soon apply to wireless networks. The end goal for Cinderella is to create the greatest possible appeal to consumers buying devices for open all-IP networks, regardless of the interests of the network operator. In the transition, Cinderella needs to make the most attractive handsets for todays network operators to distribute.
flows, carriers have locked themselves in to often immediately obsolete technology. (There are cases where vertical integration of features into the network makes sense, and these are noted in the main text.) Their weakness is inability to deploy new services and change at the speed that the network edge demands. The purpose of IP networks is not low price or efficiency: it is absolute flexibility, with the network assuming the absolute minimum about the purpose and value of the connections made over it.
Many more examples are given in the text. This is a pretty dramatic shift from the traditional hunt for new features for a consumer electronics company. Additional strategies include: focusing on features that have little or no network dependence; subversive features; creating more compelling applications; helping users dodge the carriers net; and leveraging existing market power. The main text includes a discussion of when these strategies are appropriate. To be successful, Cinderella needs to align everything it does to a move to stupid IP networks, from lobbying to venture financing, customer service to M&A. The report finishes off by recapping some of the landmark ideas that have shaped the communications revolution. In particular, all readers should become familiar with the Rise of the Stupid Network and its associated follow-ons.
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Contents
Executive summary ........................................................................................................................3 Disclaimer .......................................................................................................................................6 Introduction ....................................................................................................................................6 Part 1: Where we are ......................................................................................................................8 State of the Nation ....................................................................................................................8 Case study: Elvis has left the building ..........................................................................................9 How the carrier controls the value chain ...............................................................................9 Travelling without a ticket ..................................................................................................... 12 Part 2: Where were going .......................................................................................................... 14 Case Study: Dissecting SMS from an IP viewpoint .................................................................... 14 The disintermediation forecast ............................................................................................. 17 The only way is down ............................................................................................................ 19 Should you care about carrier disintermediation? .............................................................. 20 Identity and trust: linking the layers ..................................................................................... 21 Billing and value asymmetry.................................................................................................. 23 Understanding mediation ...................................................................................................... 24 Winners and losers ................................................................................................................. 28 Timeline ................................................................................................................................... 29 Part 3: How to get there ............................................................................................................. 31 Support to the winning side .................................................................................................. 31 Dont play with their network ball ....................................................................................... 33 Be the best footballer ............................................................................................................. 34 Have more players on the pitch ........................................................................................... 35 Bribe the public to support you ........................................................................................... 36 Cheat (but dont get caught) ................................................................................................. 36 Foul the other side.................................................................................................................. 37 Plan for the next match ......................................................................................................... 38 Change the rules ..................................................................................................................... 39 Picking your players ............................................................................................................... 39 Case study: A marriage of inconvenience .................................................................................... 40 Summary and Conclusions ........................................................................................................ 43 Appendix A Recommendations ............................................................................................ 44 Appendix B Carrier points of control of value web ........................................................... 46 Appendix C An economists viewpoint................................................................................ 49 Not everything that counts can be counted ....................................................................... 49 Option value ............................................................................................................................ 50 Lies, damned lies, operator revenue breakdowns .............................................................. 50 Appendix D History & further reading ................................................................................ 51
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Disclaimer
According to psychology research by the Harvard Business School 1, people pay too much attention to outside advice that theyve paid for. They consistently underestimate the freely available insight and knowledge of their colleagues. So once youve done reading this consultants paper, throw it away. Shred it, burn it, or bin it. Then Skype a friend and ask what they think.
Introduction
This paper isnt about the Internet. Or peer-to-peer networks. Or Wi-Fi. Or VoIP. Or even about mobile phones. Its about all of these, and the underlying forces that unite them. There are common economic, sociological and technical drivers to the changes we see today. My goal is to help you look at familiar business problems in a new light, and challenge your assumptions about whats possible. The most important of those problems today is:
How can Cinderella compete as carriers assert increased control over content, handsets, networks and distribution?
My thesis is that the current dominance of network operators over the handset makers is a transient period between two very different worlds. The tide will flow out as well as in. Cinderella wants to dominate this future world (I hope!), thus Objective #1: Be the users vendor of choice for personal communications devices operating on open IP-based wireless networks. This should be Cinderellas long-term goal. Whilst it is fine having a vision of a future that hasnt fully arrived yet, we also need to deal with the current reality of ascendant operators. Some simple and inexpensive changes to current products Cinderella could have a great deal more success in getting handsets distributed by todays powerful operators. Objective #2: Be the network operators supplier of choice for handsets not on open IP-based wireless networks. So thats the nutshell description of there and here. But what about the journey? What you need is a unifying framework. What specific criteria make it easier to sell a handset today? And tomorrow? Product development and project investments must be aligned to these trends. Without this, projects and products are launched based on projected ROIs. To be blunt, the ROI competition is won by the department that can think of the biggest number and has the positional power or political capital to force it through. If youre lucky you have a hit, like interchangeable handset faceplates or ring tones. If your numbers turn out to be a fantasy you have a flop instead (and I wont humiliate anyone by providing examples!).
The Hidden Cost of Buying Information, Harvard Business School Working Knowledge, 8 November 2004, http://hbswk.hbs.edu/item.jhtml?id=4465&t=innovation&nl=y
1
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But like a Vegas casino, wouldnt it be easier playing the market with the house odds on your side? How? You align your bets with the macro trends of the industry. The rest of this paper describes the rules of the Internet game.
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As well see, these in turn also have a common thread: The best network for the users is one that just shuffles bytes from place to place. The network doesnt assume anything about the traffic, or try to add value to those bytes. Thus new applications can arise and old ones can change without asking the carrier for
Uncommon Sense, Peter Cochrane, p200. Measured at the user, coming from: spectrum re-allocation and de-regulation, moves to smaller cells (e.g. WiFi), cognitive radios, meshing and general transmission improvements (e.g. new OFDM variants). Claude Shannon showed there was a theoretical transmission limit to a hypothetical channel, but the real world is not a single channel. 4 MuniWireless.com, 11 October 2004. According to Dailywireless.org, work begins next month on one of the IEEE's most important, and most politically charged, projects, to devise an "intelligent" air interface (cognitive radio), that can tap into unused television frequencies. This will be the standard (802.22) for fixed wireless systems that use cognitive radio techniques to switch automatically to a clear area of the band, and to avoid interfering with other occupying devices.
2 3
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permission. Advances in technology at the edge are readily captured by the end user. The user doesnt need to wait for the carrier to deploy any new features or invent a new pricing plan. The worst network for the operators is one that just shuffles bytes from place to place. Such a network offers fewer, if any, opportunities for value-add, differentiation and price discrimination of network traffic.
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The chart below shows these control factors. Each factor is rated on two axes. The horizontal axis shows the degree of control the operator exerts over the pinch point compared to the handset vendor. The vertical axis determines the amount to which the factor is exploited to support market and pricing power. At one extreme the user (or public) has no choice and the factor is exploited to the greatest possible extent to achieve price discrimination. At the other extreme, the vendor has no power over the user whatsoever. The shape of the factor shows the type of control handset, network, or other. The size of each factor indicates how important the factor is to enabling disintermediation. The shaded areas show the two key extremes, one where the network operator is in charge of everything (operator tyranny), and the other where the user has absolute freedom (user utopia). Since there are many more device makers than network operators, users have a strong bias towards handset vendor control of features.
Absolute user freedom
User Utopia
Regulatory Distribution
Customer data
User in control
Dominates Cinderella
Cinderella
Dominates Operator
Operator
Vendor in control
Handset UI configuration
Operator Tyranny
No user freedom
Cinderella Tyranny
It looks complex, but it isnt: Stuff near the bottom edge is causing the user to bleed money because of a lack of choice, control or competition. Stuff on the left makes the operator richer at the expense of Cinderella. Stuff on the right makes Cinderella richer at the expense of the operator.
Some quick usage notes. The values are my own estimates, and reasonable people could disagree over the size and position of any factor. Cinderella is welcome to perform its own analysis. The chart also aggregates positions of the two industries: Cinderella is taken to represent the whole handset and middleware space, and all carriers are treated as
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one. Obviously the degree of control, say, Vodafone has over its suppliers is likely to diverge greatly from that of the carriers as a whole. Not surprisingly, power is currently concentrated with the operators. The bottom left quadrant is where the user has little power and the carrier is in command operator tyranny. Not shown on the chart, because they offer no control to either party, are functions well inside the user utopia of choice and low prices: applications, accessories, consumer magazines, etc. With a more detailed map of the battlefield theres less excuse for shrugging our shoulders and accepting carriers as the king makers. We can instead start to analyse which carriers are in charge, how powerful they are, and where there weaknesses might be. Lets take a look at the same picture, but overlay it with the dynamics of the industry.
Absolute user freedom
User Utopia
Regulatory Distribution
Customer data
User in control
Dominates Cinderella
Cinderella
Dominates Operator
Operator
Contact handset Home page URL Proxies & gateways Application environment integration Home deck
Certification
Vendor in control
Branding
Handset UI configuration
Operator Tyranny
No user freedom
Cinderella Tyranny
With the possible exception of DRM, pretty much everything is headed in the direction of openness. More smartphones, more Wi-Fi networks, more operating systems, more choice of vendors, more carriers and MVNOs competing, tougher regulation, more spectrum, faster network technology. Now lets compare it with the wireline world. Add together the PCs, DVDs, VCRs, PVRs, phones, set-top boxes, gaming devices, Microsoft operating systems, and so on, and declare them to be the edge vendors fighting against the network operator core. The positions and sizes of the market control factors all move substantially. Its quite a contrast:
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User Utopia
Home page URL
Layer 1-3
User in control
Distribution
DRM
Dominates Operator
Operator
Dominates Edge
Edge
Regulatory
Operator Tyranny
No user freedom
Probably the only thing thats worse on wireline from the users perspective is regulation. Wireline carriers have had longer to perfect the art of regulatory capture.
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Vendor in control
Circuit voice Circuit voice Telex and telegram Fax Fax MMS for photos
Roaming charges + handset lock-down PSTN switch Gateway/separate network PSTN switch PSTN switch MMS gateway
Unlocked handsets and thirdparty prepaid SIM VoIP + Wi-Fi Fax machine
Expansys (handsets); www.oneroam.co.uk (SIM cards) Skype for Pocket PC N/A eFax Mediatrix
Fax-email gateway
Fax-IP gateway
Email + IP network; File N/A transfer in IM applications (e.g. MSN, Skype) + IP network; SMS for notification (check your email); Bluetooth file transfer; face-to-face viewing; sneakernet via flash memory cards Java/Symbian application + IP Network User-created ring tones; flash memory cards or Bluetooth Java application + IP Network SMSSend [defunct], Agilemobile Xingtone
SMS Ringtones
Push-totalk
FastMobile
Disintermediation of carrier tolls is clearly more than a few isolated examples: it is a pattern that practically forms a way of life for users. To complement these toll-bypass methods, customers can also engage in lock-in bypass by getting their handsets unlocked. There are many website that can be used to procure unlock codes for just a few euros.
Q: How might the product and sales approach differ for a closed vs. open carrier? Q: How does the role of third party retailers (e.g. Carphone Warehouse) and alternative distribution channels change with the openness of the carrier? Q: How do Cinderellas handset designs help or inhibit users to bypass carrier tolls?
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These are very misleading because they attribute the value that comes from these services to the transport element alone. I could post you a box of gold and a box of manure, but the relative transport costs tell me nothing about the postal system or the goods! You only learn about the value of the gold by being told about wedding social customs, mining costs, secure storage costs, central banking institutions, currency issuance and inflationary effects of competing stores of value. You dont learn anything about those by looking at the value of the stamp on the box. All that tells you is gold is heavy, not why the user paid $10,000 for it. IP networks help move us from a vertically integrated to a horizontally layered industry. Most of those horizontal functions have been hidden inside telcos, but are emerging as separate industries in their own right. You can assign the value of a service to the component parts of that service. (You need both an architect and a plumber to build a house, but you expect to pay more to the architect.) Before assigning value to functional elements of SMS, we need to know what those elements are. In the diagram below, Aino is sending an SMS to Bo. The key components of the transaction are shown: handsets, radio networks, SMS messaging centres, longhaul interconnect, home agents/HLRs, customer database, billing and policing. Remember, the customer sees no value any of these things per se.
10
Forget Bandwidth-Hungry Applications: Focus On Non-Voice Mobile Services That Generate Higher Profit Margins than Voice Telephony, http://www.soundpartners.ltd.uk/article_serv_prof_article.htm. This is a truly terrible piece of analysis, and I take great pleasure in picking it apart! Until you run out of spectrum or network capacity there is zero marginal cost of transmission, and capacity is a sunk cost that should be ignored. $/Mb is the worst possible metric to run a network by.
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SMSC
SMSC
Home Agent
Customer Database
Invoice
Alice
Bob
Now lets take the same picture, but look at it through our polarized value glasses:
Transmission
SMSC Universality SMSC Storage
Mobility Agent
Home
Delivery
Customer
Usability
Ubiquity
Urgency
Relevance
Alice
Governance
Figure 5 Value decomposition of SMS transmission
Bob
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So what does your 10 to send an SMS buy you? Where does the value come from? Is it the basic postage and packing charge? The ability to enter the information into the handset, tuned for usability? To have it transmitted and delivered? (Think of the difference between these as being between having the package delivered to your home address and having to collect it from the depot.) How much is attributable to the availability of coverage: the service comes to you, rather than you to it? The universality of the service via interconnect agreements? The ubiquity of the receiving apparatus? The storage of the data sent to sometimes disconnected recipients? The resolution of mobility, delivering to the user wherever they may roam? (Think of this as the difference between a package delivered to your home address and one delivered personally to you.) What value is attached to the ability to cause the recipients handset to ring and vibrate, indicating urgency to the message? (Do Blackberry users have their devices vibrate with every email? Rarely. Why not?) Every message is billed (or subtracts from a bucket), and thus has cost which would only be incurred if the message has relevance. Without this, how do you know the recipient will bother reading messages? What if the system is abused? Somehow there has to be governance, which in turn relies on some means of tracing malicious users and accountability.
You can almost imagine getting an itemised bill for each SMS, with sub-totals from 3GPP, Verisign, NeuStar, Level 3, the FCC, Cinderella and so on. Decoupling the connectivity from the service as IP networks do makes it easier for these elements to exist as separate businesses. For some, the carrier retains a natural advantage. For example, every customer has a network identity, and this naturally leads to the carrier as the supplier of digital identities. Every customer gets a bill, which makes the carrier the natural conduit for 3rd party charges. But others are under attack: witness the gradual increase in dynamic DNS services11, open ENUM registries and even competing name/address resolution systems like DUNDi. A better understanding of the sources of value helps Cinderella build products that compete or collaborate with carriers on the right parts of the value network.
Cheap, open IP networks make disintermediation of carrier services possible, but not inevitable.
People will continue to use SMS even when offered a free e-mail alternative. This is because e-mail does not have all the value attributes of SMS the customer desires (e.g. governance, ubiquity). It also lacks the economic structure that content and service providers need, such as premium charges to vote in TV reality shows like Big Brother or Pop Idol.
A long list of providers is found at http://dmoz.org/Computers/Software/Internet/Servers/Address_Management/Dynamic_DNS_Service s/. Unlike traditional DNS, the cross-reference from domain name to IP address is not cached for significant periods. If I move around I can change my IP address immediately, without waiting two days for DNS servers all over the world to propagate my record. This comes at a cost of performance and resilience. Its less functional than mobile IP, but more than adequate for 80% of user needs.
11
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The carrier cant see the traffic even when it knows the value
Companies like pCube pride themselves on being able to identify and traffic shape Skype packets etc. In principle, the carriers can try to identify toll-avoiding traffic on their packet network, and block or charge for it. But users are not passively going to pay the tolls. Applications will use non-standard ports, change the IP address of servers, encrypt or split their messages, tunnel via other protocols, and mix messages with useless salt data. Encryption via VPNs and Opportunistic IPsec (a feature of IPv6 replicable in IPv4) make the carrier even less able to enforce their pricing regimes. Do operators want to get into an arms race with their customers? Bearing in mind the lack of success of the copyright cartels13 in trimming illegal peer-to-peer networks, how likely is it that carriers can prevent the transmission of entirely legal user-generated (and user-copyrighted) content? Multi-region DVD players and unlocked handsets are hardly a rarity, so hardware control has a poor precedent at preventing revenue leakage.
12
Pricing and Architecture of the Internet: Historical Perspectives from Telecommunications and Transportation, August 2004. Much of this section paraphrases that report. http://www.dtc.umn.edu/~odlyzko/doc/pricing.architecture.pdf with commentary at http://slashdot.org/articles/04/01/03/1839206.shtml?tid=126&tid=95&tid=98&tid=99 13 Cartel A combination of independent business organizations formed to regulate production, pricing, and marketing of goods by the members. Examples: RIAA, MPAA, Business Software Alliance. 14 Philly, Verizon strike WiFi agreement , MSNBC, 30 November 2004, The city of Philadelphia and Verizon Communications Inc. struck an agreement Tuesday that would allow the city to provide wireless Internet access as a municipal service even if Gov. Ed Rendell signs legislation to give Verizon the power to scuttle the project., http://www.msnbc.msn.com/id/6622765/ 10 December 2004 Page 17 of 52 Telepocalypse Ltd. 2004
One hole in the operators spectrum cartel is Wi-Fi; it would be no surprise to see the 2.4Ghz band expand, and cognitive radios make inroads into TV UHF bands. Its just a question of time.
15
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The free browsing only refers to that within the walled garden: all other packet data is charged at premium GPRS rates. Effectively this slide states that none of the profit pool will be shared with the edge (i.e. customer or Cinderella). But it also exhibits a weakness of the carriers. The services they offer themselves are constrained by their own general packet data pricing. They cant charge more for a service than the equivalent packet data rate plus a mark-up for the value attributes discussed in the earlier dissection of SMS. If they try, and the handset and network arent locked down, then someone will bypass them. This will drive carriers towards metered services that are low value/high data need, like mobile video. Unfortunately for the carriers, the limited nature of the handset form factor makes these among the less compelling applications. You can only consume so many bits per second through a two inch screen. However, they could encourage massive use of bandwidth for video and file sharing, squeezing the capacity for general packet data and creating an artificial scarcity into which they can sell quality-of-service guarantees for a hefty price. Cellular voice is coming close to being disintermediated17: a Vodafone UK 3G card offers 75Mb for 23.50, which at 5Kb/s is the equivalent of 250 minutes of talk time. A 200 minute talk plan is 30/month. To make up the difference you would have to use a VoIP service provider, which at a blended mobile and landline rate of 5p/minute adds about an extra 10 to the 3G cost. Clearly, their pricing structure is no accident.
Taken from http://www.russellbeattie.com/notebook/1008160.html This is not to dismiss issues of quality of service and congestion; but given the marginal reputation of wireless for signal quality customers are likely to accept richer audio codecs at the expense of momentary glitches from packet loss.
16 17
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What does this mean? If the carrier has great market power and uses it to lock-down their devices and network, they will exercise strong price discrimination. High-end handsets will not realise their full potential to the user: the price discrimination will erode perceived value. Cinderella will not achieve the anticipated premium prices. What is the point of Cinderella investing billions in new service-enabling features of smartphones (e.g. Symbian OS) if Vodafone, DoCoMo and friends control the profit pool? However, low-end users may be sucked into the market by price discrimination. These might be underserved by a more traditional Cinderella handset strategy. Dont try to offer a shrunk-down laptop computer. Instead build a vertical VoIP application into a simple handset, add smart presence features and a wideband audio codec, and make it easy for the carrier to charge for it. Indeed, it may pay off to reinforce carrier control at the lower end of the market, particularly when trying to extend service into otherwise underserved or unreachable markets. At the low end of the handset market the carriers offer lower subsidies (theres only so much you can knock off a $50 wholesale price.) Many phones are even sold at a profit. The lack of a subsidy lever weakens the carriers ability to exert control over handset features. That means whatever threatening features you do want to sneak in against the carriers wishes are more easily done at the lower end of the market. Summary: Carrier in control? Forget the smartphones, keep it simple. The converse is where the carrier is weak and creates an open network environment. Here you do want miniaturised open computing platforms that make the most of IP. At the high end youll get higher margins, because the users get the full value of the product without artificial limitations. (People pay extra to buy unlocked phones today.) The end result might see carriers stratifying into ones centred on lower-end handsets with fierce price discrimination, and ones supporting faster IP networks with higher-end premium handsets.
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To illustrate the critical importance of identity collateral, note that Japan has recently flirted with an outright ban on pre-paid cellular phones20 to curb fraud and abuse. Instead they are settling for more rigorous identity checks. This administrative work will cost the carriers a lot of money. What advantage can they and the handset vendors make out of the enhanced identity collateral? The carriers have a natural advantage in providing digital identity. Everyone who buys a connection must reveal something about themselves, even if only the identity of the device to be provisioned to the network. Their natural advantage must be kept in mind when formulating competitive strategy in deploying new applications. Repeat this is not a technology problem. Choosing the right identifiers is a business issue, because they are business assets with tangible value.
Japan rejects ban on prepaid mobiles, Telecom Asia, 16 November 2004, http://www.telecomasia.net/telecomasia/article/articleDetail.jsp?id=133526 21 A misplaced confidence: see the tale of star38.com and the history of phone phreaking. 22 An Analysis of the Skype Peer-to-Peer Internet Telephony Protocol, Salman A. Baset and Henning Schulzrinne, Columbia University, September 15, 2004, http://www.cs.columbia.edu/~library/TR-repository/reports/reports-2004/cucs-039-04.pdf 23 Although a good starting point is at http://www.strategy-business.com/press/article/20964?pg=0
20
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You can expect this to spread from being an isolated example to being the norm. For consumer-to-consumer and business-to-business the exchange of value is not clear, and indeed minute-metered telephony is likely to disappear on both wired and wireless networks. (Small businesses also look and act more like consumers than business accounts.) But for business-to-consumer or consumer-to-business communications this need not be the case. Who cares if the telemarketer calls at dinner time on your premium 5/minute public number? The lesson?
The existence of free transport and carrier service disintermediation via IP doesnt mean the end of billable events.
Other variants are also possible on the charge for value exchange equation. For example, carriers who get user to call freephone numbers might get a finders fee on any sale the 21st century replacement for the yellow pages, mixed in with Googles business model. Clearly the billing capability of carriers will continue to be a source of power, and against much of the punditry that just sees the Skype phenomenon and free calling for everyone.
Understanding mediation
Smart vs. dumb pipes
The opposite of a dumb pipe is a smart pipe. Any smartness built into the network beyond simple connectivity is mediating the flow of messages, ideas and innovation between users and service providers and device makers. When and how do smart pipes make sense? How is value added by mediation of data flows? There is no shortage of Cinderella networking products that are smart pipe elements. Think of messaging gateways, web proxies, SIP proxies, and session controllers. These arent merely services on a dump pipe network that handsets can choose to draw on; rather they are the only way of connecting points of the network. Their use is compulsory. These indeed perform essential functions such as recording billable events, authorisation, non-repudiation of transactions, firewalling, media translations, and so on. Yet these functions can be performed by an autonomous edge using alternative technologies such as token-based micropayments, trusted computing, and P2P voice using newer codecs. The smart network model only makes sense in four cases, which may overlap. Getting the old and the new to work together. When there is a gap in technology generations, its sometimes easier to address the tyranny of the installed base with a smart network. For example, an analogue telephone adapter does this for a tone-dial phone and an IP network. Old handsets know nothing of new protocols, even if they have the CPU power and memory to speak them. Bleeding edge. The second scenario where smart networks win out is where there is technological deficiency, and the efficiency of a dumb pipe is not enough to sustain the application. These requirements are often non-functional in nature (e.g. availability, performance, manageability, security). In this case vertical integration of the application with the network is justified.
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Stable applications. Where no further change is expected the application can be vertically integrated with the network to optimise cost or performance. A wireless home automation system (heating, lighting, ventilation, thermostat, controls) might arguably fit this category26. The system requirements are very predictable and stable. No need for IPv6, just a low price. This scenario is not typical of mobile handsets, where the user interface is soft (a screen and alphanumeric keypad). Where the edge is blurred. Finally, you might have a smart network where the intercept and smarts occurs on the users home turf. If the user has complete control over the installation and removal of the smart networking feature, there is no economic incentive to bypass it and no restriction on innovation at the network edge. For example, consider a system that transparently intercepts email and checks for viruses, or one that scans downloads for overbearing enduser licenses27. An interesting dilemma with this case is in the corporate environment where the demand for innovation by employees (e.g. using IM systems, Skype, etc.) may exceed the appetite for change of the infrastructure owner.
An example of bad design and inappropriate tying of application functionality to the network is Bluetooth. When the technology was conceived vertical integration might have been necessary. But by the time it came to market, it was an obsolete28 technology cul-de-sac29. Now its an inflexible and restricted set of capabilities where all innovation and change needs the blessing of the carriers. This is the exact opposite of the Internet philosophy of making the connectivity as dumb as a bag of rocks. Recent attempts to put smart networking features into the network edge have flopped. Technologies like OPES [Open Pluggable Edge Servers] have largely disappeared from the map. Qualcomms EV-DV network technology is under a cloud: why include special channels for circuit voice alongside a packet network, when you can run everything over IP? The trend is clear: stupid networks are pushing out smart ones.
Proponents of ZigBee and related wireless networking standards might disagree with this example. http://www.freedom-to-tinker.com/archives/000478.html 28 http://www.hyperorg.com/blogger/archive/2002_07_01_archive.html#85215080 29 http://techupdate.zdnet.com/techupdate/stories/main/0,14179,2913885,00.html
26 27
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1876
AT&T Ma Bell era, Cellular voice
Se r
1996
vic
2000
Vonage, Cisco SIP phone
Pr
od uc t Fe atu r e
2003
Skype, Peerio
5 P2P IP application
The descent down the chain is a result of economics, not technology. A smart verticallyintegrated network lets you meter value and discourages innovation, and thus encourages users by-pass it using IP. The operator of centralised IP infrastructure will seek economic rent, again driving traffic towards peer-to-peer. A sole supplier of an applications user interface gains market power, and the user interface gets stripped off leaving the bare underlying platform. Finally that becomes an open source platform, and nobody makes any money from the basic application service any more. The last stage hasnt happened yet on voice calling. In this sixth stage, instead of a common application (e.g. POTS, Yahoo! Messenger, Skype) and user interface, an application platform with many services built on top comes to dominate. It has happened with stored media distribution already: more than 50% of P2P traffic is from BitTorrent, eclipsing the previous generation of vertically integrated IP applications, KaZaA and eDonkey. The recently released APIs from Skype are a first step30. The first ever Motorola cellular call in 1973 was a transition from stage 1 to stage 2. Internet Protocol wasnt standardised until 1981, so that was as far as it was going to go. Current 2G and 3G handsets rely on a portal and/or web proxy infrastructure to gate access to premium content centralised stage 4 technology. Future DRM technology would move that functionality into the handset, at a cost of extra memory and
For the observant, note that SIP is a protocol, not a platform. Skype APIs provide you access to a specific operational infrastructure. SIP might be used as plumbing between the components of the platform, which perform specific functions for particular owners. But SIP isnt a platform, and the future platform(s) for VoIP are still in play.
30
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management. Super-distribution of encrypted content is then possible via multiple systems including P2P. Peerios technology allows peer-based storage of files including fragmented and encrypted voicemails. Your desk phone, and all your colleagues desk phones, together store multiple copies of your voicemail. You no longer need a central voicemail server. This is also an example of a transition from stage 4 to stage 5. Their APIs are a contender for being the stage 6 platform.
This is both a threat and an opportunity to Cinderella. Handsets are products, and diverting service revenues into handsets is clearly desirable. Being just a feature of a bigger picture is a mixed blessing good if youre successful at doing alliances, bad if someone else takes control of the profit pool (the bogeyman usually being Microsoft). At the same time, as we saw in the SMS example, components of the voice calling applications may become spun out. These in turn can become services, products or features. Digital identity will remain as a service. Ubiquity might be associated with the product (e.g. leveraging Cinderellas x% market share to create a faceplate market). Storage of messages becomes a feature of a device, not a network service.
Do you really need a SIP proxy? A session border controller? A media gateway? A traffic shaper? Whats the price in terms of flexibility of the solution? Is the solution full of mediation, but just shifted to an IP platform? Skype has equivalents to all these functions, but not implemented as $500,000 boxes sold to telcos. Given Skype works and scales, how much value are these products adding?
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Examples
Flextronics, Compal SkyCross, Texas Instruments Virgin Mobile
Winner or Loser
Winner
Why?
More change and innovation at the edge shortens replacement period. Dont carry marketing costs, inventory risk, etc. in times of rapid change. Fortunes tied to that of handset OEMs. Innovation in sales and distribution likely to be more critical than product innovation for retail of access services. Massive amount of unrealised innovation potential; sticky applications with increasing returns to scale from community use and group forming Dominance of platform over pipe; localisation and application testing/certification. No news that peer-to-peer is a problem. Possibility of big wins later with service-oriented business models (e.g. selection of music of likely interest) Increased choice requires middleman to help filter and perform QA. Unable to retain consumer surplus, facilities competition, regulation. Open IP access networks will spur additional demand. Low margin, high volume, predictable profit; exclusive rights-of-way (road, railway, pipeline, pylons) form barriers to entry. Continued destruction of traditional switch and PBX business, but increased layer 1 and 2 sales Likely to offer better deals than retailers tied to one network
Winner Winner
Application developers Software vendors Media content creators Aggregators and publishers Access network operators Long-haul data network operators Network equipment vendors Independent Retailers
Jamdat
Winner
Microsoft Disney
Winner Losers?
Lucent, Nortel
Mixed
Carphone warehouse
Winner
31
Cinderella is deliberately not in this list; whilst it is part OEM/ODM, it also performs value chain orchestration that cant be summarised so simplistically. Overall, Cinderellas a winner.
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Timeline
As you can see from the evolution of voice calling, change is rapid through the last few stages. How soon can Cinderella expect to wait before the floodgates of wireless IP connectivity are opened? Lets take a look at the key ingredients: Technology. Fast low-latency symmetric IP networks are coming on stream32. Flarion, IP Wireless, and Wi-Fi are here now. WiMAX, as long as I stays the course, will arrive in 2005 for large-scale deployment in 2006/7. Its close cousin, 802.20, is on a similar timescale. The 802.22 standard will allow re-use of TV spectrum for IP networks. The team has just started work and might deliver useable hardware in 2-3 years. Scaling of mobile mesh networks is still a basic research problem. Regulation. The FCCs Spectrum Policy Task Force issued its initial report on reform in 2002, and continues to modernise US spectrum policy. The UKs OFCOM has expanded unlicensed wireless spectrum by 50% in its Q4 2004 review. The Norwegians have just auctioned off 3.5GHz for IP wireless. Operators. Nextel are flirting with a Flarion roll-out in the US, and even the second-rate alternatives (EV-DO, HDSPA, EDGE) are good enough for VoIP, even if the scaling characteristics and latency are lousy. Some are waking up to the reality that they really are just going to be a bit pipe33. Customers. VoIP is transitioning from early adopters to early majority. The chasm is being crossed. Theyre used to IP applications on the wired Internet. Theyre ready.
UMTS may be a dead-end: its stuck in a world of distributing stale packaged media content over asymmetiric links that dont cope well with bursty two-way IP traffic. In a bid to maximize bits per hertz and peak throughput its lost sight of the users needs: low latency, low jitter, low channel access times, predictable throughput, symmetric. More bandwidth comes last after all of those. Metro Wi-Fi is a big deal, with a real addressable market by 2006-7. Wi-Fi in the home and enterprise is a reality already. The time to act is now. However, to do a rigorous analysis of the changes in operator control and IP network deployment would require a data collection effort beyond the scope of this paper.
Q: As new applications are embedded in handsets, which of the value components from the SMS example might be overlooked? How can Cinderella gain advantage by fixing these? Q: How easily can users track their data use on Cinderella devices? Does this matter? Q: What are the circumstances where people could use their mobile phone but choose to use an alternative service (e.g. landline phone, e-mail)? What features might be added to a handset to enable greater price discrimination in such situations in favour of the handset? Q: What would the effect on Cinderella be if SPIT (Spam over Internet Telephony) becomes common? How could Cinderella phones be made more attractive to users, or less likely to be
The Qualcomm EV-DO roadmap fails to make the grade: too much latency, poor reverse link scaling, highly asymmetric. 33 http://eurotelcoblog.blogspot.com/2004/12/japan-gets-it-one-of-my-japanese.html
32
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Q: Open Wi-Fi access points are common in the USA and Europe. What are the implications for identity collateral? What is the likely future of this situation? Q: What current Cinderella features are being used in a B2C or C2B context where there might be a mismatch between the value received and the payment made? What opportunities exist to create such services? Q: Which Cinderella products (network as well as handset) are associated with which stages of application development? What technologies might threaten them? How might Cinderellas product portfolio look in 5 years from now measured on this scale? Q: What happens to operator handset subsidies on all-IP networks? Do operators subsidize handsets more in order to retain control over them? Or do they find it impossible as margins are squeezed, and users buy open/unlocked handsets to avoid carrier tolls? Who stands to gain from an open environment and might become an alternative source of subsidy? Q: If the current circuit-switched cellular voice network didnt exist, and we suddenly invented fast IP-based networks, what would the services look like when freed from past design constraints? Would British callers always send you their current weather along with the caller ID? Would we start or end calls, or just fade in and out multiple audio streams, some of which would be like a baby monitor or TV in the background?
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Now for the meat: what Cinderella needs to do to appeal to todays operators and tomorrows users. How does Cinderella avoid losing at football when playing against the bigger kids?
Non-billable services (e.g. built-in games, address book sync) Operating system Handset form factor Development platform Developer program UI framework
Handset customer acquisition and retention Peripheral to Cinderellas business Core to Cinderellas business
Cinderellas product handset innovation is currently focused on quadrant C. In combating the threat from carriers attention normally gets focused on quadrant B. But this fight over control is a win/lose proposition, and Cinderella might be the loser. A better approach in the short term is quadrant A, the win/win space. Cinderella can make the carrier happier in ways that dont hurt Cinderella. Lets look at how by examining how carriers make and lose money.
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Service revenues
Theres not a lot Cinderella can do about the hardware platform costs of carriers, bar giving its own products away for free. But there is a lot that can be done elsewhere. To stimulate your thinking here are some examples of innovations Cinderella could engage in. To increase service revenues: Increase impulse buying of MMS messages by adding one-click send of photos to most common/likely recipients. Increase SMS to voice call up-sell by adding message at bottom of SMS display Press TALK to call Jukka Tolonen. Likewise from voice to video call, or voice call to 800 number to an m-commerce transaction. Birthday marked in the calendar? An anniversary? Remind them to call! Dont make users remember top-up call numbers, directory enquiries, etc. Etch them on the back of the phone. Add features that actively enable carriers to perform price discrimination. This could be as simple as handsets flagging discounts at certain periods to particular individuals for named services (e.g. MMS). (Discounting a high standard price is economically the same as raising a low standard price at other times, but the framing makes a world of difference in customer acceptance.) Create handset environments and content vending services that serve to obfuscate real prices through mechanisms such as loyalty points. Increase pre-paid top-up frequency and amount. Remind the user to top-up. Pitch offers. Increase carrier free cash flow.
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To decrease customer acquisition & retention costs: Enable viral customer acquisition (e.g. SIM cards that can support multiple carriers and encourage on-the-spot switching, customers can message coupons to each other). Make handsets that encourage on-net calls by highlighting callers with on-net call rates. Make customer fear cost of off-net call rates if switching. Build RFID tags into handsets for stock tracking. Turn the home screen into a trouble ticket tracking facility; avoid customers calling in for status updates. Make the phone and network elements more aware of network congestion, decrease support calls about service quality. Distribute a how to DVD with each new phone introducing the key features.
Im sure the collective intellect of Cinderella can come up with much better examples than the few I have thought up. The key thread is that these all treat the carrier as the real customer, with (on average) no loss of welfare to the end user in their implementation. This has the additional benefit of sweetening some bitter pills that Cinderella might try to feed to operators.
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Trend #2: Presence and Pre-sense. An extraordinary (and rather long) paper39 from Douglas Galbi, an economist at the Federal Communications Commission, suggests that there are three fundamental modes of communication: information-passing, narrative and presence. However, he draws a much wider scope around presence. Think of it as the sense of being there, or that which enables us to make sense of what we see and hear (literally pre-sense what you contextually feel before you make sense of the message). Presence is a form of sensuousness, and Galbi reaches for examples such as medieval illuminated manuscripts to help us understand the colder modern methods of communication. He suggests services which communicate sensuous presence make the most money. By this argument, applications like Skype with high-quality audio codecs that help you hear the breathing and subtle intonation are extremely compelling. Why doesnt your phone let you feel or hear your lovers heartbeat? Why isnt 3G used to deploy better audio codecs where you can hear each others breathing? Trend #3: Immersive. There are likewise three forms of narrative40, of increasing value. They are: Story-Telling: unidirectional, passive audience, linear (film, TV, radio, print, etc.)
Content is not King, Andrew Odlyzko, First Monday, January 2001, http://www.firstmonday.dk/issues/issue6_2/odlyzko/ 39 Sense in Communication, Douglas Galbi, October 2003, http://www.galbithink.org/sense1.pdf 40 The Age of Story-Dwelling, http://evelynrodriguez.typepad.com/crossroads_dispatches/2004/11/the_pace_of_the_2.html
38
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Story-Forming: bi-directional, interactive (board games, conversation, computer games, some live theatre, etc.) Story-Dwelling: multi-dimensional, immersed participants, networked (live sports, MMORPGs, simulation, real life, most good networked media, i.e. internet)
What is a Blackberry device other than a way of immersive dwelling in the corporate soap opera? Trend #4: Group forming. Networked communications services come in three flavours, also of increasing value: Sarnoffs Law states that broadcast-type networks increase in value with the number of nodes. Ten times the viewers, ten times the value. Streaming media works this way. Metcalfs Law suggests that networks which enable peer-to-peer communications increase in value with the square of the number of nodes. Ten times the participants gives a hundred times the number of possible connections. The phone network is like this, if we discount conference calling. Reeds Law takes this further. Communications systems that enable arbitrary group forming increase in value exponentially (~2n) with the number of nodes. Ten times the users, a thousand times the number of possible groups. Chat rooms work more like this.
To put it crudely, its more fun doing it in a group than in pairs, and only losers do it on their own. Unsurprisingly there are caveats, limitations and shades of grey. (If you discuss a TV programme around the office coffee machine, was it a broadcast application or a group-forming one?) But collaborative applications that enable rapid assembly and dissolution of groups have the theory on their side. Trend #5: People really like to talk. You dont say! But you wouldnt guess it from the 3G hype and crash. Talk is compelling for some of the reasons above interactive, sensuous, collaborative, etc. But theres more to it than that. Voice calling is ripe for reinvention. Why isnt voicemail ever stored on the phone? Why do I have to end every call cant I just listen in? I do on Skype! Why can I only hear one call at once maybe I can have a chat with someone in the foreground while waiting for the conference call to start in the background. How to integrate picture taking with calling? Why cant I see what youre seeing? Why is sending a picture a separate experience from the call, and something I have to interrupt the call for?
This phenomenon of increasing returns works at two levels. At one extreme it works across whole user populations within a carrier, country or globally. In some ways Cinderella has devolved this increasing returns to scale issue to the Symbian effort. But how much of Symbians resources are devoted to me too type features versus things that have positive network effects? At the other end of the spectrum comes a single household. If Dad buys a Cinderella phone, what features would make Mum and the kids buy them too? Just like Microsoft vertically ties the browser and Office into Windows, how can Cinderella horizontally tie purchases together?
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The Chinese have a massive trade deficit in intellectual property goods and a reputation for piracy of software, music and movies. Chinese DVD players often have an easily accessible, ahem, service menu that enables region switching.
It isnt unheard of for devices to be riddled with hidden functionality that goes against the interests of the distributors or content providers but is attractive to end customers. Phone unlock codes, mod chips for Playstations, hacked PVRs, overclocked CPUs. People have always been tinkering with the artificial limits on their hardware. It would be unethical to actively pursue a program of hidden trapdoors. However, Cinderella doesnt need to be over officious in preventing exploration and full exploitation of the handsets hardware. Its the equivalent of tugging at the other players shirt when tackling them. Ungentlemanly, impolite, but not a red card offence. Ill leave the rest to your imagination.
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Neither of these is fixed in stone, and both can improve over time. Cinderella can give itself an advantage by anticipating changes in policy and improvements in technology. The installed base should provide the least possible drag in moving to open IP networks. Changes in policy are the easiest to deal with. Every lock-down feature of a phone should be reversible over-the-air (using IOTA or whatever standard Cinderella chooses). Nothing should be burned in permanently: if a carrier changes their mind, the existing handsets should not be a barrier to change. Cinderella should try to support features that associate the lock-down policy with the network the phone provisions to, not the handset itself. So if you roam to a different network with a more liberal outlook, the phone would automatically adopt the new profile. New types of IP-friendly air interface technology generally require a new handset. But there are plenty of lesser changes that occur: new protocols, new types of service, new networked resources. If it isnt doing so already, Cinderella probably ought to be seeding the market with the following features where economic and technical constraints allow: The only certainty is uncertainty. Make upgrades to the firmware quick and painless and preferably under user control. TCP/IP stack even in phones that are officially voice and SMS only. IPv6 support where possible SIP and encryption protocols in the API profile of every handset Support for dynamic DNS services. Create a Cinderella DDNS service to map IMEI/MEIDs to IP addresses and other entries! Make it possible for users to discover their IP address and tell if its static or dynamic, public or private. 35% of all Internet traffic comes from the BitTorrent P2P service41, but no Cinderella phone contains a BitTorrent client. Spot an opportunity? Support for audio codecs better than that of POTS42. API access to low-level IP services.
41 42
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43 44
http://ipaction.org/ http://www.eff.org/
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User Utopia
MANY
FEW
Operator Tyranny
HIGH
LOW
So some good news we seem to have something to do in each situation. But it also means there is no one-size-fits-all strategy. The fragmentation of the industry suggests that Cinderella may have to follow some quite radically different strategies in different markets. This suggests that regional managers may have more decision making authority over product development than they do today.
Group Pronounces Cellular and Wi-Fi Husband and Wife, The Feature, 3 September 2004, http://www.thefeature.com/article?articleid=101040
45
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But for consumers, this is counter-strategic. Why deploy handsets that are at the mercy of the carrier gatekeepers? The first generation of VoWiFi phones are limited in functionality and often originate from obscure brands46. This is a clear opportunity for Cinderella to seize the one widely available fast wireless IP network technology and integrate advanced IM, presence, etc. features into portable (rather than mobile) handsets. The existing mobile handset base can be leveraged with features like address book exchange. Consider the recently released DualPhone47: The worlds first cordless 2-in-1 Skype Internet telephone - for maximum freedom and minimum telephone bills! The new Cordless DUALphone is the first cordless Internet telephone on the market, using Skype. [] The Cordless DUALphone is a cordless telephone that can be connected to a normal telephone socket and a USB port on a PC. The display shows whether your friends who also use Skype, are online. If they are, you simply have to press the appropriate green button and talk to them for free [] If their PC is switched off, or you want to call someone who doesnt use Skype, you simply press the other green button and call via the standard telephone connection. It just requires Cinderella to stop thinking of itself as a mobile phone company, or even a lifestyle brand, and just meet the unmet needs of users. Isnt this the type of product Cinderella should be using its brand and distribution to promote? Isnt Cinderellas expertise in stretching battery life, building UIs and packaging a match? What happens to Cinderellas traditional handset business if these cordless phones get access to extensive broadband IP networks due to spectrum reallocation? What if Wi-Fi access became more pervasive48,49? How does Cinderella view Ciscos entry into Wi-Fi phones? This is a classic Innovators Dilemma. The new phones appear sub-functional to Cinderella because of their restricted mobility. But the market is satiated in terms of mobility and has moved on to enhanced functionality. These devices have the potential to erode Cinderellas market base from the bottom up.
Q: How do Cinderella handsets stack up against competitors in terms of ARPU, churn, care costs, etc.? Does anyone measure and track this? Q: How does Amazon.com increase impulse and repeat purchase? What lessons are there for handset operators?
For example, Zyxel Prestige P2000W Wi-Fi Phone, http://www.zyxel.com/product/P2000W.php. No, I didnt know about them either. 47 http://www.dualphone.net/ 48 Grand Rapids funds wireless-Web study City officials have commissioned a $19,000 study to gauge the feasibility of installing a citywide high-speed wireless Internet system in Michigans secondlargest city., Detroit News, 17 October 2004. http://www.detnews.com/2004/technology/0410/17/b06e-305642.htm 49 Taipei gets world's largest Wi-Fi grid The Wi-Fi access points that will link computers to the Web in Taipei will be attached to traffic and street lights, creating a network that will cover 90 percent of the city by the end of 2005., CNN.com, 22 November 2004, http://www.cnn.com/2004/TECH/internet/11/22/taiwan.cybercity.reut/index.html
46
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Q: Cinderella has sold approximately x million handsets in the last year. If these customers all pulled out their phones right now, what would they see on the screen? How does this make money for Cinderella or the operator? How does this make Cinderella the most attractive handset for carriers to distribute? How could this situation be improved? Q: How well does Cinderella manage the development of features that require little or no access to the air interface? Are these managed as a portfolio, or in functional silos? Q: How effective do you feel Cinderellas current approach at product portfolio and project pipeline management is at aligning development resources with the trends in this paper? Q: Can retail customers differentiate between open and locked down Cinderella handsets (e.g. missing Bluetooth profiles)? If not, how could this be signalled in a way that doesnt upset carriers too much? Q: How could Cinderella market and distribute handsets that carriers might not like? Q: Was Microsofts approach to Netscape unethical bullying or merely good business sense in the face of a threat to the core Windows franchise? What are the lessons for Cinderella? Q: How might users switch carriers more easily with a Cinderella device? Q: If Cinderella didnt have to get carrier approval for each device, how would the feature set change? Which of those features could be deployed now, even if inactive or inaccessible? Q: To what extent do carrier handset subsidies distort markets and fair competition50? How could Cinderella turn these trends to its advantage? Q: How well aligned are Cinderellas lobbying activities with a move to end-to-end IP networks? (Examples might include spectrum regulation, copy protection mandates, municipal wireless networks.) Do they receive appropriate funding?
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Appendix A Recommendations
DO: Examine the list of points of control the carrier has, one by one, and try to find ways of undermining them. DO: Build a tracking capability for the points of control and toll bypass as part of Cinderellas routine competitive intelligence. Try to build a picture of the battle for control between the user, carrier and hardware/middleware supplier. Track sales margins against network openness, to find the trends. DO: Explicitly model the full value proposition of new products and services. Make a consistent policy on which parts to fight for, which ones to hand to carriers, and which ones to form alliances with other Internet service providers. DO: Tailor pricing policies and distribution channels according to the degree of competition, openness, subsidy and availability of non-carrier distribution networks (e.g. supermarkets, independent retailers.) Build a go-to-market strategy that pushes the market towards more open devices and networks. DONT: Leave pricing and distribution entirely to local sales forces struggling to meet quotas irrespective of strategic needs. DO: Carefully consider the choice of identifier in Cinderella-supported services (e.g. phone number vs. email address vs. application-specific user ID). Treat this as a business decision, not just a human factors issue. DONT: Try to compete with the carriers in offering identifiers that require identity collateral. Youll lose. DO: Look at the data involved in the products and services Cinderella plans to offer now and in future. In what ways is the capture, storage and transmission of that data trusted by the systems users? How will the system work if the elements are distributed in a peer-to-peer fashion? DO: Add appropriate billing hooks into services, even on open IP networks, where value is being exchanged. DONT: Try to set the price of all IP services to zero and just be happy with a handset sale. DO: Consider pushing Symbian towards an open-source model to increase the innovation pressure on the carriers. Increase the rate of innovation and change, unleash unexpected uses. Proprietary platform technologies can only succeed if bolted to proprietary applications: for instance, without Microsoft Office, Windows would give way to Linux in the enterprise. Symbian doesnt have an Office. DO: Look at the functional components of smart network components made by Cinderella (above the TCP/UDP layer), and determine how essential it is that function is performed in the network, on the network or at the edge. DONT: Simply shift old technology, architectures and business models onto IP and expect success. DO: Appeal to the core metrics of carriers: ARPU, CPGA, churn, cash cost per user. DONT: Deploy cool new features without knowing how it impacts these metrics.
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DO: Continue with non-network services and communications, even if the initial market reception is weak (e.g. NGage). Push these hardest in markets where networks and handsets are locked down the tightest. Offer non-network ways of getting data in and out (e.g. flash memory cards) wherever practical. DO: Try to have some theoretical underpinning as to what creates compelling value, and allocate research and product development resources accordingly. DO: Focus on voice and pictures. Its sensuous, interactive, personal. Not stale media content shrunk to a tiny screen and warmed over with microwaves. DO: Understand the point of IP is not cheaper voice calls, its new features and services. GO RE-INVENT TELEPHONY DONT: Just replicate POTS voice calling on IP, which is what is mostly happening today with Wi-Fi and other IP phones. Its a dead end a canal boat pulled by a steam engine. Build a railway instead.
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What it is
Handset
Which operating system, browser, and middleware goes onto the phone. Menus and look/feel of the handset The URL of the browser home page. Users cant set Yahoo or MSN as their home page. Whether Java etc. applications are able to access handset resources (e.g. address book, camera, air interface). Prevent the transmission of content over the network under complete user control Ensure only approved applications are deployed
Handset Handset
Yes Yes
No No
Handset
Carriers
Yes
Weakening: Increasing profusion of devices with powerful APIs. Some control over air interface access (to prevent abusive applications) likely to persist, but all other forms of handset access likely to be forced on carrier by market competition. Mixed: Stronger legal control (via DMCA, EUCD, etc.) but more powerful handsets offering more opportunity for DRM bypass. Weakening: Not the accepted model on Pocket PCs, wont fly with user-owned Wi-Fi connections, 3rd parties doing most of the work and taking control.
DRM
Handset
Carriers
Yes
Yes
Certification
Handset
Carriers
Yes
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Carriers
Air interface and lowlevel network protocols that a best-effort IP connection on the handset doesnt see. What content is by default presented to users.
Yes
Yes (QoS)
Constant: or weakening Faster networks make optimizations here less important, although cellular/Wi-Fi handoff of increasing important (until some cracks putting 2 independent radios into an IP phone). Weakening: May control own portal, but users going via bookmarks to non-official sites (e.g. Sprint PCS Vision users to 3gvisioncorrection.com) as well as traditionally popular non-partner sites. Weakening: increasing roaming onto 3rd party and user-owned networks. Potential anti-trust issues for carriers collaborating to block 3rd party services. Constant: No easy substitute that can be initiated by the end user.
Network
Carriers
No
Network
Carriers
Control the ability to make IP connections, based on direction, IP port number and IP address. Where the handset is, and its IP address. The rest of the world doesnt know that. NAT, Mobile IP, Home Agent, Dynamic DNS. Gateways and proxies through which data flows (e.g. HTTP, SIP, SMS, MMS).
Yes
Network
Carriers
Yes
Proxy/gateways in network
Network
Carriers
No
Weakening: P2P bypassing some of these (e.g. Skype for Pocket PC). Technical necessity morphing away from patching technology deficiencies (slow airlink, weak handset processor) in favour of bridging technology generations (e.g. transcoding). Weakening: Roaming onto Wi-Fi and other networks makes these harder to sustain.
Numbering
Network
Carriers
Ability to create short codes with unique semantics (e.g. rescue service) Control ability to provision and authenticate to network provider.
No
Network
Carriers
Weakening: Wi-Fi in home, office; ability to self-provision to third party Wi-Fi; likely similar model for WiMax.
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Data pricing
Carriers
No
Yes (e.g. Vodafone Live! offers free browsing inside walled garden) No
Mixed: Conflicting tension of technology for fine-grained price discrimination yet customer desire for pricing simplicity. Constant: Will persist as long as carrier keeps out of prepaid and stay in business.
Other
Carriers
Set of customer data (name, address, credit class, demographic, etc.) that most carrier partners and competitors dont have. Complete marketing and distribution chain, including e-commerce, stores, agents and direct sales force. Trusted applications (e.g. banking, m-wallet) and privacy-sensitive applications (e.g. LBS) require brand support Control flow of money rather than bits: interconnect and termination fees, equal access regulations
Yes
Distribution channels
Other
Carriers
Yes
No
Strengthening: More carrier-owned retail outlets. But only has value if carrier can provide compelling revenue-bearing products to fill the channels with. Strengthening: Consolidation of smaller operators into larger groups (e.g. Vodafone, Orange, Cingular) increases brand presence.
Branding
Other
Handset makers
No
Yes (Higher charges for content than equally available from 3rd parties) Yes
Regulatory
Other
Carriers
Yes
Mixed: Example of 0870 regulatory capture in UK, but increasing EU and FCC insistence on meaningful regulation and erosion of market power.
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The effect of IP networks is a massive increase in consumer surplus. For the reasons outlined earlier this is because it is hard to meter the value they deliver and price discriminate. The question is how to measure and reason about something that by definition is not monetised. Recent thinking sees much of this consumer surplus (for communications products) as forming relationship capital. We use the cheap communications tools to create and reinforce our social ties. The challenge is to understand and model this phenomenon, and then relate it to product investment and directing research. Interestingly, it has been suggested51 that as little as 2.2% of the true value of innovation is captured by the innovators themselves. Considering an invention such as the internal combustion engine or fibre optics and their transformational effect on society, this is perfectly plausible.
51
Schumpeterian Profits in the American Economy: Theory and Measurement, William Nordhaus, NBER Working Paper No. w10433, http://www.nber.org/papers/w10433
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Option value
A common myth is that IP networks are somehow more efficient than circuit-switched ones (or any other type of dedicated-purpose networks). This isnt true. IP networks are a trade-off between efficiency and flexibility. The advantage of an IP network is that its creators assume the minimum possible about its future uses. This maximises the option value of the network. For those interest in pursuing this further, I can suggest reading A Real Options Framework Illustrating the Economic Value of the End-2-End Argument by Mark Gaynor and Scott Bradner52. The value of a stupid IP network increases with the uncertainty of the uses it might be put to. The profusion of new social networking services suggests there is a lot of uncertainty in precisely the part of the industry most likely to generate future telecom revenues. However, there is an unforeseen consequence of placing all the complexity at the edge of the network (and thus the costs). The critical part of the value network with the biggest increasing returns to scale effect is the application developer community. Software engineers only want to develop for platforms that will have a big audience. But those self-same developers have little or no interest in the costs of operating the software they produce. Thus the consumer surplus created by high option value is eroded in practice by the extremely high maintenance and operational costs53. For PCs this is typically quoted as being 20% hardware and 80% labour. So will dumb pipes displace all smart ones? No. Efficiency does sometimes count, and not every situation is full of uncertainty. If you send a probe to Mars you know at the outset what hardware it will have and what protocols are needed. You arent going to pop round to Radio Shack and add on some unforeseen functionality half way through the mission. Less extreme examples occur in wireless and enterprise computing. So we can see a co-existence of smart and stupid networks for some time to come.
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End-To-End Arguments In System Design, J.H. Saltzer, D.P. Reed and D.D. Clark http://www.reed.com/Papers/EndtoEnd.html (originally pub. ACM Transactions in Computer Systems 2, 4, November, 1984) 55 Great-grandma Bell: Is the once great telecoms company on its last legs?, The Economist , Oct 28th 2004. 56 World of Ends: What the Internet Is and How to Stop Mistaking It for Something Else., Doc Searls and David Weinberger, http://www.worldofends.com/ 57 The Paradox of the Best Network, David Isenberg and David Weinberger, http://www.netparadox.com/
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Whilst it recaps many of the same points as Rise of the Stupid Network it adds these vital and succinct observations: No one owns it. Everyone can use it. Anyone can improve it. The Paradox of the Best Network was inspired by the observation of analyst Roxanne Googin that the best network was also, in her words, the perfect capital repellent. It is impossible to understand the dynamics of telecom without understanding this paper. That said, I dont completely agree with their ideas there are some escape clauses like identity that they miss. Examples include the carriers advantage in the digital identity business, and the dynamic rather than static nature of telecom (profit exists where there is change). Also on your reading list should be Digital Imprimatur58, which is a comprehensive overview of the social failings of the Internet, but equally could be viewed as a manifesto of business opportunities of problems to be fixed. Finally I can recommend Tussle in Cyberspace: Defining Tomorrows Internet59 which covers many of the same issues as this paper, but with a more academic background and much greater rigour.
Digital Imprimatur, John Walker, September 13th, 2003 http://www.fourmilab.ch/documents/digital-imprimatur/ 59 Tussle in Cyberspace: Defining Tomorrows Internet, SigComm 2002, http://www.acm.org/sigs/sigcomm/sigcomm2002/papers/tussle.pdf
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