Geddes - Stupid Network

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The Stupid Network: A User Guide

Prepared for CinderellaSomewhere, Somecountry

Prepared by: Martin Geddes, Director

Document version: 0.1

Date: 10 December 2004


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Abstract

Carriers keep control of the wireless value web by controlling pinch points on the flowof value through handsets, networks and retail supply chains. This gives them powerover their suppliers. They can also perform fine-grained price discrimination againstusers for the value that flows over the network. A move to open all-IP networksundermines this business model, and enables massive disintermediation of carrier tollsystems. This paper describes the mechanics of this change, what the important valuecreators will be in an all-IP world, and suggests strategies and tactics for the varyingmarket conditions along the way.

Change History

Date Who Version Changes

7 Nov 04 Martin Geddes 0.1 Document outline created.22 Nov 04 Martin Geddes 0.2 First draft.

3 Dec 04 Martin Geddes 0.3 Cinderella v0.2 comments addressed.10 Dec 04 Martin Geddes 0.4 Added context diagram for the strategies; details

on trust, billing, abuse; executive summary.18 Dec 04 Martin Geddes 0.5 14 Dec conference call comments addressed

Contacts

For Telepocalypse Ltd.:

Martin Geddes, DirectorTelepocalypse Ltd,

26/5 Annandale St., Edinburgh,

EH7 4AN, UK.Skype: mgeddes Yahoo: mgeddes_uk

[email protected]

For Cinderella:

About the Author

Martin Geddes is thinker, writer, coder, inventor, agitator, irritant and consultant. Hewrites the popular telecom strategy weblogwww.telepocalypse.net, cited by BusinessWeek and Forbes among others. Before becoming an independent consultant he was atechnology specialist and product strategy manager at Sprint in Kansas City, USA.

During his time at Sprint he filed 17 patents on various mobile handset and edge servicetechnologies. Martin also has extensive hands-on experience in the IT industry buildinglarge transactional systems at Oracle Corporation. He holds a bachelor's degree inMathematics and Computation from Oxford University.

Telepocalyptic Quote

Who will be the biggest losers [from VOIP]? Not the fixed-line telcos, even thoughtheir revenues may fall by 25% by 2010 due to VOIP, according to Mr Mewawalla. Themobile operators are likely to be the big losers, with their revenues plunging by 80%.

Together, VOIP and wireless broadband could fatally undermine their costly third-

generation (3G) networks. - The Economist, 2 December 2004


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10 December 2004 Page 3 of 52 Telepocalypse Ltd. 2004

Executive summary

Cinderella is finding it harder to maintain margins and volumes in the face ofconsolidating and powerful wireless network operators. At the same time, wireline

operators are facing significant voice service revenue loss from VoIP, and are failing tocreate new billable events from other newer IP applications. Technology improvementssuch as Wi-Fi and FLASH-OFDM suggest similar dynamics will soon apply to wirelessnetworks.

The end goal for Cinderella is to create the greatest possible appeal to consumersbuying devices for open all-IP networks, regardless of the interests of the networkoperator. In the transition, Cinderella needs to make the most attractive handsets fortodays network operators to distribute.

How network operators gain and lose control

Network operators maintain command over the value web by controlling manyindividual value pinch points. These may be embedded in the handset, in the network,or external to both. Examples include the selection and positioning of menu entries, thehome page URL, the ability to locate a handset and route inbound connections, and theestablishment of carrier-specific retail outlets. The report provides a detailed breakdownof their nature, importance and future.

These control points enable carriers to divide the profit pool in their favour compared toCinderella, and engage in fine-grained price discrimination against users. In return, usersexpend considerable effort in bypassing these toll systems, and frequently meet withsuccess. Avoidance of international voice toll fees, messaging charges and premiumcontent costs are a way of life for many users.

As the industry restructures from vertical integration to horizontal layers (separating datatransport from service), the individual components that make up a communicationsservice are exposed and potentially become separate businesses. The report uses SMS asan example of a dozen or so value elements hidden inside.

Come on down, the price is wrong

The prognosis for carrier control and ability to price discriminate is that such powers willsteadily weaken over the rest of this decade. Other networked industries, primarilyinvolving physical transport of goods and people, have experienced intensifying pricediscrimination over time. Yet the technical and economic structure of the Internet, as a

transport for information goods, is fundamentally different. These precedents only serveto illuminate those differences.

Keys to the operators power base

Two critical elements are billing and digital identity. Even in a world where datatransport is virtually free, there is likely to be an asymmetry in the end-user value of manycommunications resulting in a desire for creating a billable event. Digital identitytraceable to real people, places and things provides vital glue to the system, preventingabuse. The carriers retain a critical advantage in these two areas.

New ideas, not lower prices or arbitrage

Other parts of the value network, however, are ripe for transfer outside of carriercontrol. By creating smart core networks that attempt to meter and add value to data


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flows, carriers have locked themselves in to often immediately obsolete technology.(There are cases where vertical integration of features into the network makes sense, andthese are noted in the main text.) Their weakness is inability to deploy new services andchange at the speed that the network edge demands. The purpose of IP networks is notlow 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.

Speak clearly after the tone

This paints a potentially bright future for Cinderella, where constant innovation inapplications drives an incessant demand for new handsets. A consequence is that muchof the current approach to VoIP, which recreates the PSTNs approach on an IPinfrastructure, is fundamentally flawed. IP enables completely new modes ofcommunication, richer in sensuous forms of presence, group forming and collaboration.

Voice remains at the heart of this, something frequently lost in the 3G content labyrinth.

Wi-Fi networks are a key starting point, because they are the dominant form of fast,

open wireless IP networks deployed today. However, Cinderella is compromising itsposition here by its preference for dual-mode handsets, which have to defer to theinterests of incumbent cellular carriers. Cinderella is potentially conceding a key strategicmarket to non-traditional device competitors because it over-values mobility comparedto price and new functionality.

Playing your cards in the game of telecom

To address the market changes Cinderella needs a multi-faceted approach that recognisesthat different markets enjoy varying levels of incumbent power and availability of IPnetworks to deliver value to users.

The most important change Cinderella can make is to view its handsets as sales outlets

for carrier services. Simple changes can make Cinderella handsets more appealing to thecore metrics of carriers (ARPU, CPGA, CCPU, churn, free cash flow). The best possiblesales message to a carrier is not a sexy new form factor, nor a juicy discount. Itsevidence of better core financial performance, for example by

On-screen reminders for pre-paid users to top up.

Impulse buying of MMS messages with one-click send to the 2-3 most likelyrecipients (a-la Amazon one click).

Highlighting on-net calls to reduce churn Calling Bob at Home (free on-netcall!)

Many more examples are given in the text. This is a pretty dramatic shift from thetraditional hunt for new features for a consumer electronics company.

Additional strategies include: focusing on features that have little or no networkdependence; subversive features; creating more compelling applications; helping usersdodge the carriers net; and leveraging existing market power. The main text includes adiscussion of when these strategies are appropriate.

To be successful, Cinderella needs to align everything it does to a move to stupid IPnetworks, 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 theRise of the Stupid Network and its associated follow-ons.


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Contents

Executive summary ........................................................................................................................ 3Disclaimer ....................................................................................................................................... 6Introduction .................................................................................................................................... 6Part 1: Where we are ...................................................................................................................... 8

State of the Nation .................................................................................................................... 8Case study:Elvis has left the building.......................................................................................... 9How the carrier controls the value chain ............................................................................... 9

Travelling without a ticket ..................................................................................................... 12Part 2: Where were going.......................................................................................................... 14

Case Study: Dissecting SMS from an IP viewpoint.................................................................... 14The disintermediation forecast ............................................................................................. 17The only way is down ............................................................................................................ 19Should you care about carrier disintermediation? .............................................................. 20Identity and trust: linking the layers ..................................................................................... 21Billing and value asymmetry .................................................................................................. 23Understanding mediation ...................................................................................................... 24

Winners and losers ................................................................................................................. 28Timeline ................................................................................................................................... 29

Part 3: How to get there ............................................................................................................. 31Support to the winning side .................................................................................................. 31Dont play with their network ball ....................................................................................... 33Be the best footballer ............................................................................................................. 34Have more players on the pitch ........................................................................................... 35Bribe the public to support you ........................................................................................... 36Cheat (but dont get caught) ................................................................................................. 36Foul the other side .................................................................................................................. 37Plan for the next match ......................................................................................................... 38Change the rules ..................................................................................................................... 39Picking your players ............................................................................................................... 39Case study:A marriage of inconvenience.................................................................................... 40

Summary and Conclusions ........................................................................................................ 43Appendix ARecommendations ............................................................................................ 44Appendix BCarrier points of control of value web ........................................................... 46Appendix CAn economists viewpoint................................................................................ 49

Not everything that counts can be counted ....................................................................... 49Option value ............................................................................................................................ 50Lies, damned lies, operator revenue breakdowns .............................................................. 50

Appendix DHistory & further reading ................................................................................ 51


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Disclaimer

According to psychology research by the Harvard Business School1, people pay toomuch attention to outside advice that theyve paid for. They consistently underestimate

the freely available insight and knowledge of their colleagues. So once youve donereading this consultants paper, throw it away. Shred it, burn it, or bin it. Then Skype afriend and ask what they think.

Introduction

This paper isnt about the Internet. Or peer-to-peer networks. Or Wi-Fi. Or VoIP. Oreven 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 tohelp you look at familiar business problems in a new light, and challenge yourassumptions about whats possible. The most important of those problems today is:

How can Cinderella compete as carriers assert increased controlover content, handsets, networks and distribution?

My thesis is that the current dominance of network operators over the handsetmakers is a transient period between two very different worlds. The tide will flow outas well as in. Cinderella wants to dominate this future world (I hope!), thus

Objective #1:Be the users vendor of choice for personal communicationsdevices operating on open IP-based wireless networks.

This should be Cinderellas long-term goal. Whilst it is fine having a vision of afuture that hasnt fully arrived yet, we also need to deal with the current reality ofascendant operators. Some simple and inexpensive changes to current productsCinderella could have a great deal more success in getting handsets distributed by todayspowerful operators.

Objective #2: Be the network operators supplier of choice for handsets not onopen 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 ahandset 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 andhas the positional power or political capital to force it through. If youre lucky you havea hit, like interchangeable handset faceplates or ring tones. If your numbers turn out tobe a fantasy you have a flop instead (and I wont humiliate anyone by providingexamples!).

1The 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


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But like a Vegas casino, wouldnt it be easier playing the market with the house odds onyour side? How? You align your bets with the macro trends of the industry. The rest ofthis paper describes the rules of the Internet game.


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Part 1: Where we arePowerWhy the carriers have it and you dont

State of the Nation

So there is a war between operators and device manufacturers to capture the value of theusers communications. What does the battlefield look like today?

Application functionality is increasingly moving from the centre of networks(switches, video servers, session border controllers and home agents) to the edge(PCs, PVRs, PDAs, phones and other connected devices). Peer-to-peer is theultimate expression of this trend.

The computing and communications power available at the edge are increasing atan exponential rate. CPU speeds, storage capacity, wireline and wirelesstransmission speeds all have doubling periods between 9 months and 2 years2.

Wireless spectral capacity increases fastest of all!3

The dissolution of carrier control over wireline networks has been slowlyunfolding over a period of 30 years. None of the major new applicationsenabled by the Internet has resulted in new billable events for telecom carriers: e-mail, IM, chat, web, multi-user gaming or peer-to-peer file sharing.

Change for wireless networks will be faster and nastier than for wireline ones.

Rights of wayspectrumare about to become plentiful4

. Network equipmentis cheap, and much of the infrastructure is paid for by end users. Furthermore,the cost of wireless network deployment is more closely linked to actualsubscribers than potential subscribers passedyou can start small.

The next generation of wireless networks from Flarion, IP Wireless, Kaon, etc.are low latency, cope with bursty traffic, have built-in QoS if needed, and highthroughput and spectral efficiency. Perfect for moving IP packets around.

WiMAX if it ever rolls out is just a bonus on top of these. Thesetechnologies are as transformational to telecom as the arrival of the machine gunon the military battlefield.

As well see, these in turn also have a common thread:The best networkfor the users is one that just shuffles bytes from place to place. Thenetwork 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

2Uncommon Sense, Peter Cochrane, p200.3 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.4MuniWireless.com, 11 October 2004. According to Dailywireless.org, work begins next month onone 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 cleararea of the band, and to avoid interfering with other occupying devices.


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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 newpricing plan.

Theworst networkfor 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.

Case study: Elvis has left the building

Before we look at the deeper issues brought by end-to-end IP networks, lets set thescene with a recap of what is happening to voice on the Internet.

Perhaps the most important aspect of VoIP isnt the rise of alternative service providerslike Vonage or AT&T CallVantage. Its the creation of totally new voice products andthe complete loss of service revenue for traditional voice providers.

By my own measurements5, Skype is currently supplying around 7.5bn minutes of use ayear. This is 15% more than the annual outgoing international call volume from theUnited Kingdom6. Monthly growth rates are in the tens of percent range7. They areadding 100,000 registered user accounts every day8.

Anecdotal evidence is that much Skype use is for international calling, and thus doesachieve some form of toll displacement. There is no public available data on how muchSkype usage is incremental to PSTN calling vs. displacement of PSTN calls. However,taking an average (and conservative) $0.02/minute displacement rate this would suggestSkype is responsible for $150m loss of profit to the global telecom industry. It isnt hardto imagine a figure of ten times that for the global private VoIP applications industry,once Xbox Live and comparable services are added in. Whilst this seems small comparedto a $1300bn industry turnover, it all comes from the bottom line. A recent and credibleanalyst estimate is of a total EUR6.4bn loss just within Western Europe by 20089.

Consumer acceptance of VoIP and massive growth once given a broadbandconnection are now a proven fact. The presence, IM and conferencing features ofSkype coupled with excellent usability are all icing on the free calling cake. But thecrucial lesson is IP telephony is about innovative features and new modes of use. It isnot about interconnect arbitrage, regulatory bypass or cheaper replicas of the past.

How the carrier controls the value chain

At a high level, carriers control the cellular industry in three ways: the messages theyallow to flow over the network, the features and configuration of their handsets, and theretail distribution and branding of handsets. A detailed breakdown is shown in

Appendix B Carrier points of control of value web. These are the capabilities thatenable carriers to price discriminate against users and restrict competition from outsidethe carrier industry.

5 Skype.com 12 noon 13 Nov 2004: 2,470,915,990 minutes served; 10.38am 20 Nov 2004: 2,616,605,453minutes served.6 http://eurotelcoblog.blogspot.com/2004/10/skype-billions-and-billions-served-few.html

7 http://www.henshall.com/blog/archives/000525.html8 E-mail from Skype PR representative, 22 November 2004.9 http://research.analysys.com/default.asp?Mode=article&iLeftArticle=1777&m=&n=


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The chart below shows these control factors. Each factor is rated on two axes. Thehorizontal axis shows the degree of control the operator exerts over the pinch pointcompared to the handset vendor.

The vertical axis determines the amount to which the factor is exploited to supportmarket 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 theother extreme, the vendor has no power over the user whatsoever.

The shape of the factor shows the type of control handset, network, or other. Thesize 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 incharge of everything (operator tyranny), and the other where the user has absolutefreedom (user utopia). Since there are many more device makers than networkoperators, users have a strong bias towards handset vendor control of features.

Operator

DominatesCinderella

Cinderella

DominatesOperator

No user freedomOperator Tyranny

User Utopia

Handsetsoftwareplatform

Handset UIconfiguration

Layer 1-3

Absolute user freedom

Networkpacket flow

Home pageURL

Contacthandset

Proxies &gateways

DRMApplication

environmentintegration

Numbering

Home deck

Regulatory

Customerdata

Branding

Certification

Distribution

Userincontrol

Vendorincontrol

Which vendor is more in control?

Provisioning& Roaming

Cinderella Tyranny

Figure 1 - Market power map of wireless today

It looks complex, but it isnt:

Stuff near the bottom edge is causing the user to bleed money because of a lackof 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 coulddisagree over the size and position of any factor. Cinderella is welcome to perform itsown 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 todiverge greatly from that of the carriers as a whole.

Not surprisingly, power is currently concentrated with the operators. The bottom leftquadrant is where the user has little power and the carrier is in command operatortyranny. 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 ourshoulders 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 mightbe.

Lets take a look at the same picture, but overlay it with the dynamics of the industry.

Operator

D

ominatesCinderella

Cindere

lla

DominatesOperat

or


User Utopia

Handsetsoftwareplatform

Handset UIconfiguration

Layer 1-3


Networkpacket flow

Home page

URL

Contacthandset

Proxies &gateways

DRM

Applicationenvironmentintegration

Numbering

Home deck

Regulatory

Customerdata

Branding

Certification

Distribution

Userincontrol

Vendorincontro

l

Which vendor is more in control?Provisioning& Roaming

Cinderella Tyranny

Figure 2 -- Dynamics of market control in wireless

With the possible exception of DRM, pretty much everything is headed in the directionof openness. More smartphones, more Wi-Fi networks, more operating systems, morechoice of vendors, more carriers and MVNOs competing, tougher regulation, morespectrum, 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 acontrast:


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Operator

DominatesEdge E

dge

DominatesOperator


User Utopia

Device

softwareplatform

Device UIconfiguration

Layer 1-3


Networkpacket flow

Home pageURL

Contactdevice

Proxies &

gateways

DRM

Applicationenvironmentintegration

Numbering

Regulatory

Customerdata

Branding

Certification

Distribution

Userinc

ontrol

Vendorincontrol

Which vendor is more in control?

Figure 3 -- Market control map of wireline world

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.

Travelling without a ticket

The economic goal of a carrier is to extract value from communications over its networkthrough the generation of billable events. Nothing else counts. To do this, you have toprice discriminate between the messages that flow over the network. But the customersare increasing finding ways around those toll barriers. The trend has been running fordecades, but is now accelerating.

The table below illustrates just some of the ways in which telecom customers bypasscarrier tolls. This list is by no means exhaustive. The methods highlighted in bold rely onan IP network for by-pass. Those in italics use circuit-switched telephony as thetransport.

Service Toll gate Means of bypass Examples

Circuitvoice

International callinterconnect

Calling cards IDT

Circuitvoice

Premium rates forcross-network calls(e.g. mobile to

mobile)

Prefix dialling of landlinenumbers to preserve bucket for x-net calls

www.80550.co.uk


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Circuitvoice

Roaming charges +handset lock-down

Unlocked handsets and third-party prepaid SIM

Expansys (handsets);

www.oneroam.co.uk(SIM cards)

Circuit

voice

PSTN switch VoIP + Wi-Fi Skype for Pocket PC

Telex andtelegram

Gateway/separatenetwork

Fax machine N/A

Fax PSTN switch Fax-email gateway eFax

Fax PSTN switch Fax-IP gateway Mediatrix

MMS forphotos

MMS gateway Email + IP network; Filetransfer in IM applications(e.g. MSN, Skype) + IPnetwork; SMS for

notification (check youremail); Bluetooth filetransfer; face-to-face

viewing; sneakernet via flashmemory cards

N/A

SMS Mobile originatedmessage charges

Java/Symbian application+ IP Network

SMSSend [defunct],Agilemobile

Ringtones Download vendingmachine

User-created ring tones;flash memory cards orBluetooth

Xingtone

Push-to-talk

Gateway/proxy Java application + IPNetwork

FastMobile

Disintermediation of carrier tolls is clearly more than a few isolated examples: it is apattern that practically forms a way of life for users. To complement these toll-bypassmethods, customers can also engage in lock-in bypass by getting their handsetsunlocked. There are many website that can be used to procure unlock codes for just afew 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 alternativedistribution 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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Part 2: Where were goingWealth Where it comes from, where it goes to

Case Study: Dissecting SMS from an IP viewpoint

How do IP networks enable disintermediation of carrier services and tolls? To find out,lets take apart the familiar SMS service. The goal is to understand what value the carriermight be adding. We can then start to discuss how and when the carrier might bebypassed.

Many articles on price discrimination of IP data transport include a table along thefollowing lines10:

Service kBconsumption

ExamplePricing

Revenueper MB

SMS ringtone/logo 0.2 kB $2 (UK) $13,981

SMS message 0.1 kB $0.15 (UK) $1,573

Complex ringtone/logo 2.0 kB $3 (UK) $1,536

Java download (game) 15 kB $3 (Japan) $204

1 min voice call 144 kB $0.10 (US) $0.71

These are very misleading because they attribute the value that comes from these servicesto the transport element alone. I could post you a box of gold and a box of manure, butthe relative transport costs tell me nothing about the postal system or the goods! Youonly learn about the value of the gold by being told about wedding social customs,mining costs, secure storage costs, central banking institutions, currency issuance andinflationary effects of competing stores of value. You dont learn anything about thoseby 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 asseparate industries in their own right. You can assign the value of a service to thecomponent 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 thoseelements are. In the diagram below, Aino is sending an SMS to Bo. The key componentsof the transaction are shown: handsets, radio networks, SMS messaging centres, long-haul interconnect, home agents/HLRs, customer database, billing and policing.Remember, the customer sees no value any of these thingsper se.

10Forget Bandwidth-Hungry Applications: Focus On Non-Voice Mobile Services That GenerateHigher 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 worstpossible metric to run a network by.
http://www.soundpartners.ltd.uk/article_serv_prof_article.htmhttp://www.soundpartners.ltd.uk/article_serv_prof_article.htm


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SMSC SMSC

CustomerDatabase

Home

Agent

Alice Bob

Invoice

Figure 4Functional decomposition of SMS transmission

Now lets take the same picture, but look at it through our polarized value glasses:

SMSC SMSC

CustomerDatabase

Home

Agent

Alice Bob

Invoice

Mobility

Transmission

Storage

Ubiquity Urgency

Governance

Relevance

Accountability

Universality

Availability Delivery

Usability

Figure 5Value decomposition of SMS transmission


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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 informationinto the handset, tuned for usability? To have it transmitted and delivered?(Think of the difference between these as being between having the packagedelivered to your home address and having to collect it from the depot.)

How much is attributable to the availability of coverage: the service comes toyou, rather than you to it? The universality of the service via interconnectagreements? The ubiquity of the receiving apparatus?

The storage of the data sent to sometimes disconnected recipients? Theresolution ofmobility, delivering to the user wherever they may roam? (Thinkof this as the difference between a package delivered to your home address andone delivered personally to you.)

What value is attached to the ability to cause the recipients handset to ring andvibrate, indicating urgency to the message? (Do Blackberry users have their

devices vibrate with every email? Rarely. Why not?) Every message is billed (orsubtracts from a bucket), and thus has cost which would only be incurred if themessage has relevance. Without this, how do you know the recipient will botherreading messages?

What if the system is abused? Somehow there has to be governance, which inturn relies on some means of tracing malicious users and accountability.

You can almost imagine getting an itemised bill for each SMS, with sub-totals from3GPP, 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 naturaladvantage. For example, every customer has a network identity, and this naturally leadsto the carrier as the supplier of digital identities. Every customer gets a bill, which makesthe carrier the natural conduit for 3 rd party charges. But others are under attack: witnessthe gradual increase in dynamic DNS services11, open ENUM registries and evencompeting name/address resolution systems like DUNDi. A better understanding of thesources of value helps Cinderella build products that compete or collaborate with carrierson the right parts of the value network.

Cheap, open IP networks make disintermediation ofcarrier services possible, but not inevitable.

People will continue to use SMS even when offered a free e-mail alternative. This isbecause 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 serviceproviders need, such as premium charges to vote in TV reality shows like Big Brother orPop Idol.

11 A long list of providers is found athttp://dmoz.org/Computers/Software/Internet/Servers/Address_Management/Dynamic_DNS_Services/. 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 daysfor DNS servers all over the world to propagate my record. This comes at a cost of performance andresilience. Its less functional than mobile IP, but more than adequate for 80% of user needs.


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The disintermediation forecast

So in this fight to extract the value from the network, who will win? Can carriers set upeffective toll booths on the wireless Internet?

The carrier doesnt know the value of the traffic

Telecom isnt the first network-based industry involved in the transport or transmissionof goods and services. The physical distribution networks such as canals, railroads,turnpikes, airlines or lighthouses have served the routing needs of commerce forcenturies. These have formed exquisitely complex price discrimination regimes andcounter-regulatory structures. Wont telecom go the same way?

No. The Internet is genuinely unique, and its structure suggests these parallels will notresult in the same price discrimination architecture12. The complexity is at the edge, andis changing rapidly. That makes it hard to build pricing mechanisms into the network

when the network has little knowledge of the application and its worth. Informationgoods lack the predictable uniformity of physical goods: a canal boat has a very narrowrange of practical uses compared to a fast Internet connection.

The carrier cant see the traffic even when it knows the value

Companies like pCube pride themselves on being able to identify and traffic shapeSkype packets etc. In principle, the carriers can try to identify toll-avoiding traffic ontheir packet network, and block or charge for it. But users are not passively going to paythe 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 uselesssalt 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 thelack of success of the copyright cartels13 in trimming illegal peer-to-peer networks, howlikely is it that carriers can prevent the transmission of entirely legal user-generated (anduser-copyrighted) content? Multi-region DVD players and unlocked handsets are hardlya rarity, so hardware control has a poor precedent at preventing revenue leakage.

The carrier doesnt have anything left to charge for

Technology is rapidly increasing available bandwidth. Lack of scarcity means lack ofeconomic rent. The biggest priority for carriers should be increasing usage, not capping

it via high charges. Scarcity can only be artificially imposed via oligopolistic marketstructures or lobbying to exclude competition14.

12Pricing and Architecture of the Internet: Historical Perspectives from Telecommunicationsand Transportation, August 2004. Much of this section paraphrases that report.http://www.dtc.umn.edu/~odlyzko/doc/pricing.architecture.pdf with commentary athttp://slashdot.org/articles/04/01/03/1839206.shtml?tid=126&tid=95&tid=98&tid=9913 CartelA combination of independent business organizations formed to regulate production, pricing,and marketing of goods by the members. Examples: RIAA, MPAA, Business Software Alliance.14Philly, 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 providewireless Internet access as a municipal service even if Gov. Ed Rendell signs legislation to give Verizon thepower to scuttle the project., http://www.msnbc.msn.com/id/6622765/


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One hole in the operators spectrum cartel is Wi-Fi; it would be no surprise to see the2.4Ghz band expand, and cognitive radios make inroads into TV UHF bands. Its just aquestion of time.

Users wont play the game

The users pay directly for Internet connectivity. However, most physical transportcharges are for cargo or business use that is subsequently incorporated into other goods.

The user doesnt see the price discrimination that charges extra for a truckto cross a tollbridge compared to a car.

Behavioural economics tells us that people react extremely negatively to pricediscrimination, and are willing to pay extra for simple prices, especially flat-rate ones.

Most of the costs of physical transport systems were associated with the core of thenetwork. The Internet reverses this. Since the edges are paying most of theinfrastructure costs (e.g. PCs, game consoles, phone handsets), they control the system.

Efforts to price discriminate via handset and network control can backfire, as thisreview15(and many similar ones) pans Verizons lock-down efforts:

Verizon customers have been waiting for a phone with a feature list like thaton the Motorola V710. Unfortunately, the phone doesn't live up toexpectations. To transfer photos out to your PC, you'll have to purchase amemory card or pay to e-mail them to yourself. We think it's unfair of

Verizon to limit the phone in that way.

Other carriers undermine efforts to charge

Consider a market like Denmarks with many incumbents and MVNOs. Whats thequickest and cheapest way to differentiate yourself from your competition? Make your

network and handsets more open. Hence theres an openness ratchet effect thataccompanies increasing competition.

It hasnt worked yet

Efforts at price discrimination and rationing scarcity within the data transport networkhave so far met with limited success. Think of ATM, QoS, RSVP, MPLS, multicasting,congestion pricing and active networks. Not one has achieved its economic goals. Thebig growth continues to be in best-effort IP networks. The money spent on networkprice discrimination and rationing is better allocated to simply increasing capacity.

15 PC Magazine, undated, http://www.pcmag.com/article2/0,1759,1639784,00.asp


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The only way is down

The Vodafone Live! 3G launch explicitly says they are trying to move towards valuepricing on their network16:

Figure 6 - Vodafone steers customers away from open Internet

The free browsing only refers to that within the walled garden: all other packet data ischarged 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 areconstrained by their own general packet data pricing. They cant charge more for aservice than the equivalent packet data rate plus a mark-up for the value attributesdiscussed in the earlier dissection of SMS. If they try, and the handset and networkarent locked down, then someone will bypass them. This will drive carriers towardsmetered services that are low value/high data need, like mobile video.

Unfortunately for the carriers, the limited nature of the handset form factor makes theseamong the less compelling applications. You can only consume so many bits per secondthrough a two inch screen. However, they could encourage massive use of bandwidthfor 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 cardoffers 75Mb for 23.50, which at 5Kb/s is the equivalent of 250 minutes of talk time. A200 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 addsabout an extra 10 to the 3G cost. Clearly, their pricing structure is no accident.

16 Taken from http://www.russellbeattie.com/notebook/1008160.html

17 This is not to dismiss issues of quality of service and congestion; but given the marginal reputation ofwireless for signal quality customers are likely to accept richer audio codecs at the expense of momentaryglitches from packet loss.


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Should you care about carrier disintermediation?

Yes. In monopolistic markets price discrimination reduces consumer welfare. Itdecreases usage, lowers perceived service value, and diverts the customer

communications budgets away from the network edge. However, in competitive marketsprice discrimination works to achieve a more efficient allocation of resources18.Furthermore, it extends the market downwards: people who could not previously haveafforded the service now can, cross-subsidised by others who are paying more for thesame service. This points us to a critical lesson:

Go downmarket where the carriers are in control.Go upmarket where the edge is in command.

What does this mean? If the carrier has great market power and uses it to lock-downtheir devices and network, they will exercise strong price discrimination. High-endhandsets 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 thepoint 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. Thesemight be underserved by a more traditional Cinderella handset strategy. Dont try tooffer a shrunk-down laptop computer. Instead build a vertical VoIP application into asimple handset, add smart presence features and a wideband audio codec, and make iteasy 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 somuch 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 handsetfeatures. That means whatever threatening features you do want to sneak in against thecarriers 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. Atthe 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 handsetswith fierce price discrimination, and ones supporting faster IP networks with higher-endpremium handsets.

18Price Discrimination,http://www.tutor2u.net/economics/revision_focus_2004/A2_Price_Discrimination.pdf


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Identity and trust: linking the layers

Identity in a nutshell

Lets try to understand how critical identity is in the future of telecom. Thecommunications industry is slowly and painfully transforming from vertical integration tohorizontal layers. Those horizontal players then gain economies of scale within theirlayer and niche.

The glue between these layers is identity. Cinderella must have a digital identitybusiness strategy to be successful in managing this change. Every interactionbetween the layers involves some explicit or implicit exchange of identity data about thething being exchanged. Without it, no value can flow between the layers. This is not atechnology problem.

Economic value in identities

We can create many types of identities: phone numbers, IP addresses, handset IMEI, e-mail address, personal domain name, account number, etc. Two key things differentiatethese identities. The first is the existence of links from the digital identity to real people,places and things. The second is the extent to which they are either explicitly revealed tothe target of the communication, or can be traced back via a third party. Does it point tosomething real? Can I find out what it points to? When an identity is offered intransaction in a way that can be traced back to someone who would suffer a loss as aresult then this identity possesses identity collateral.

Landline connections are associated with a place. Post-paid cellular is associated with aperson through a credit check. And pre-paid cellular is associated with a device. Abuse

could respectively result in arrest, exclusion or device deprovisioning.The value of identity collateral comes from preventing abuse rather enabling services.Telecom isnt alone in finding theres a significant profit to be made from mitigating theundesirable effects from some underlying technology. For example compare theabundance of food of modern agriculture and the diet and pharmaceutical industries thatmanage the resulting obesity. Or motor vehicles and the insurance industry19.

The money isnt in making VoIP calls. Its in stopping unwanted ones frommaking your phone ring!

Again this is not a technology problem. Identity creates value in specific situations.Understanding how they are related is key to making money from the disaggregated

components of a voice call.

Good identities cost money to make

Whilst a carrier might spend $25bn building a network, it can also cost $5-10bn toacquire the customers and their identity data. Just because the balance sheet onlydepreciates the network doesnt mean the identity data isnt core to the operation of thatprovider. Consider the difference in fortunes of retail telecom operators (who haveidentity collateral for sale) and their wholesale dumb pipe competitors who dont.Identity is big business, just a hidden one. What about directory businesses with 50% (ormore) marginssurely theyre just sorted lists of identities?

19 Largest US automobile insurer 2003 profit: $3.1bn (State Farm). Largest US automobile manufacturer:$3.8bn (General Motors).


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To illustrate the critical importance of identity collateral, note that Japan has recentlyflirted 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 willcost the carriers a lot of money. What advantage can they and the handset vendors makeout of the enhanced identity collateral?

The carriers have a natural advantage in providing digital identity. Everyone who buys aconnection must reveal something about themselves, even if only the identity of thedevice to be provisioned to the network. Their natural advantage must be kept in mind

when formulating competitive strategy in deploying new applications.

Repeatthis is not a technology problem. Choosing the right identifiers is a businessissue, because they are business assets with tangible value.

Trust the other side of identity

Telcos are trusted by their customers in a big way: your calls arent wiretapped withoutdue authority, your call details are kept private, calls are routed correctly, caller ID

works21

, your voicemails are secure, you rely on the system for emergency service, and soon. With a smart network, much of that exchange of value occurs within the telcoscastle walls. This reduces the amount of trust required in the system, because noboundaries are crossed. It also reduces the cost. For example, the phone doesnt needto authenticate to the voicemail system as well as the network.

But when you distribute these functions to the edge of the network, they start crossingtrust boundaries. If the telco just supplies connectivity, someone or something else isdoing all the above functions. Its much harder to build a trusted distributed system.

For instance, the more recent peer-to-peer file-sharing networks have become poisonedwith deliberately mislabelled and incomplete files spread by irate rights holders.

Napsters centralized directory architecture made it less resilient to legal attack but easierto build trust. Skype maintains a centralised authentication architecture22, despite everyother aspect of the system being distributed to the network edges.

Some bad news: nobody I know of has really cracked the measurement and classificationof trust for public networks, or related it to the economics of communications andplaced a value on it23. Yet without trust the system collapses: it is worth hundreds ofbillions of dollars. A possible research area for Cinderella?

One last timethis is not a technology problem. Trust is tied to branding. Brand is abusiness issue. Whose logo lights up and says trust me?

20Japan rejects ban on prepaid mobiles, Telecom Asia, 16 November 2004,http://www.telecomasia.net/telecomasia/article/articleDetail.jsp?id=13352621 A misplaced confidence: see the tale of star38.com and the history of phone phreaking.22An 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.pdf23 Although a good starting point is at http://www.strategy-business.com/press/article/20964?pg=0


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Billing and value asymmetry

If VoIP calls are free, why do we need billing? And without billing, what does a telcohave to offer? Here lies an unexpected source of operator power.

The costs of network technology are decreasing, while the costs of complex billingsystems remain somewhere between amazing and extraordinary. At some point thebilling part of telecom may become a major or dominant cost compared to the network.

A common misconception is that this is somehow ridiculous and unsustainable, and willcause a collapse of the telcos.

This is a superficially a very attractive argument. Surely the transaction costs of anefficiently run service should always be low? Definitely. However, a communicationsservice is often partly a brokerage fee. That means some of your money is beingpassed on to a third party. Even with zero transaction costs, youll still have to pay.

One case is where there are termination fees of some sort. This is the exception rather

than the rule on the Internet, so until VoIP calls to Mars become a common reality, wellnot discuss it further.

The other case where charges persist is when the caller is drawing on the resources orattention of the callee. There is some exchange of value going on, and the direction andmagnitude of the exchange are clear. Such charges are made via explicit or hiddenpremium rate tolls. Standard premium rate numbers are well known and merit nofurther discussion. The hidden ones are of greater interest, however, since they mayact as a precedent for a wide range of services in future.

The United Kingdom has a fascinating system whereby calls to the 0870 area code24 aretied to an obsolete BT national calling rate. This rate is vastly more expensive than the

cheap rates national calling rates available in the competitive marketoften by an orderof magnitude or more. Revenue sharing is allowed with the callee, typically at a rate ofaround 3-4p (US$0.07) per minute. In other words, this is a premium rate calling system,but with a lower price than on standard premium rate services (typically 20p-100p/minute). The low unit price is made up for with massive volume.

This numbering scheme exists despite the 09xxx number range in theory having beenassigned as the sole means of offering premium services, and 08xxx being for non-geographic numbers (like 0800 freephone). Thousands of companies, large and small,have flocked to using these 0870 numbers for inbound calls. An airline or utilitycompany might run up hundreds of millions of minutes of use, and the revenue starts tobecome a lot of money. Indeed, according to the UK regulator between a quarter anda third of BTs metered call revenues come from 0870 (and similar) numbers25.Most companies block outgoing calls to 09xxx numbers, but not 08xxx numbers, sothere have been few barriers to adoption.

What companies are doing is using their temporary market power over customers toextract revenue. Want to change your airline ticket? Ask some questions of the shopstaff? Complain about the goods you bought? Get ready to pay. Oh, and since there isno limit on the use of queuing systems on 0870 numbers (unlike 09xxx premium ratenumbers), the longer you wait the more you pay. Devious.

24Other codes, such as 0871 and 0845 are also used. For simplicitys sake, we shall only refer to 0870.25 OFCOM, NTS (Number Translation Services) focus group meeting notes and action, 3 June 2004,http://www.ofcom.org.uk/ind_groups/ind_groups/telecommunications/nts_focus/notes/nts20040603


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You can expect this to spread from being an isolated example to being the norm. Forconsumer-to-consumer and business-to-business the exchange of value is not clear, andindeed minute-metered telephony is likely to disappear on both wired and wirelessnetworks. (Small businesses also look and act more like consumers than businessaccounts.) 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 yourpremium 5/minute public number?

The lesson?

The existence of free transport and carrier service disintermediationvia IP doesnt mean the end of billable events.

Other variants are also possible on the charge for value exchange equation. Forexample, carriers who get user to call freephone numbers might get a finders fee on anysalethe 21st century replacement for the yellow pages, mixed in with Googles businessmodel.

Clearly the billing capability of carriers will continue to be a source of power, and againstmuch 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 networkbeyond simple connectivity is mediating the flow of messages, ideas and innovationbetween users and service providers and device makers. When and how do smart pipesmake 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. Thesearent 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 iscompulsory.

These indeed perform essential functions such as recording billable events, authorisation,non-repudiation of transactions, firewalling, media translations, and so on. Yet thesefunctions can be performed by an autonomous edge using alternative technologies suchas 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 theinstalled base with a smart network. For example, an analogue telephone adapterdoes this for a tone-dial phone and an IP network. Old handsets know nothingof 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 wherethere is technological deficiency, and the efficiency of a dumb pipe is not enoughto 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 canbe 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 verypredictable 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 andalphanumeric keypad).

Where the edge is blurred. Finally, you might have a smart network where theintercept and smarts occurs on the users home turf. If the user has completecontrol over the installation and removal of the smart networking feature, there isno economic incentive to bypass it and no restriction on innovation at thenetwork edge. For example, consider a system that transparently intercepts e-mail and checks for viruses, or one that scans downloads for overbearing end-user licenses27. An interesting dilemma with this case is in the corporateenvironment where the demand for innovation by employees (e.g. using IM

systems, Skype, etc.) may exceed the appetite for change of the infrastructureowner.

An example of bad design and inappropriate tying of application functionality to thenetwork is Bluetooth. When the technology was conceived vertical integration mighthave been necessary. But by the time it came to market, it was an obsolete28 technologycul-de-sac29. Now its an inflexible and restricted set of capabilities where all innovationand change needs the blessing of the carriers. This is the exact opposite of the Internetphilosophy 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 fromthe map. Qualcomms EV-DV network technology is under a cloud: why include specialchannels for circuit voice alongside a packet network, when you can run everything overIP? The trend is clear: stupid networks are pushing out smart ones.

Stages of application evolution

Most computer applications have a rich heritage stretching back into a pre-computerisedworld: despite what Silicon Valley would have you believe, social networking didnt beginin 2003. The base capability normally goes through six stages of evolution. Theapplications core function stays constant, although the form mutates and the reach,speed and convenience increase over time. For example, the act of sending a body oftext for later delivery has been achieved through hand-delivered scrolls, the postal

service, telegram, telex, fax, email, and SMS.The diagram below illustrates a simplified view of the stages of evolution of every classof communications application. Voice calling is used to illustrate the stages. In realitythere is overlap of the stages, jumping of stages, grey areas between stages, concurrenttransition of several stages, and even occasional regression (e.g. Napsters closure).

26 Proponents of ZigBee and related wireless networking standards might disagree with this example.

27 http://www.freedom-to-tinker.com/archives/000478.html28 http://www.hyperorg.com/blogger/archive/2002_07_01_archive.html#8521508029 http://techupdate.zdnet.com/techupdate/stories/main/0,14179,2913885,00.html


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Works onIP, meetsuser needs

Needs adedicatednetwork

Works on IP,some loss offunctionality

Nobody canbuild it yet

5

2

3

P2P IPapplication

1

4

?

Vonage,Cisco SIP phone

Net2Phone,Yahoo! IM voice chat

AT&TMa Bellera,Cellular voice

1876

1996

2000

2003

6

Integratedplatform

Skype,Peerio

2005

Service

ProductFeatu

re

Figure 7Evolution of communications applications

The descent down the chain is a result of economics, not technology. A smart vertically-integrated network lets you meter value and discourages innovation, and thus encouragesusers by-pass it using IP. The operator of centralised IP infrastructure will seekeconomic rent, again driving traffic towards peer-to-peer. A sole supplier of anapplications user interface gains market power, and the user interface gets stripped offleaving the bare underlying platform. Finally that becomes an open source platform, andnobody 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 acommon application (e.g. POTS, Yahoo! Messenger, Skype) and user interface, anapplication platform with many services built on top comes to dominate. It hashappened with stored media distribution already: more than 50% of P2P traffic is fromBitTorrent, 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 gateaccess to premium content centralised stage 4 technology. Future DRM technology

would move that functionality into the handset, at a cost of extra memory and

30 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 theplatform, which perform specific functions for particular owners. But SIP isnt a platform, and the futureplatform(s) for VoIP are still in play.


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management. Super-distribution of encrypted content is then possible via multiplesystems including P2P.

Peerios technology allows peer-based storage of files including fragmented andencrypted voicemails. Your desk phone, and all your colleagues desk phones, togetherstore 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 acontender for being the stage 6 platform.

Services, products and features

Voice calling is turning from a service into a product, and then from a product into afeature of a larger communication and collaboration system:

You pay for a service on a recurring basis. This is either metered (depending onhow much you used) or flat-fee (usually with a slight price premium againstaverage usage to reflect the user value of predictable charges).

A product is a one-off buy, like a SIP adapter box and a telephone. If it works asadvertised, you buy two Peerio phones, plug them in, and get voicemail andcalling without any service provider needed.

The feature of speak to someone not physically present is being subsumed intolarger systems like Xbox Live, Skype, or Yahoo! Messenger in conjunction withpresence, collaboration, workflow, group forming and vertical applicationfeatures. These have very diverse business models.

This is both a threat and an opportunity to Cinderella. Handsets are products, anddiverting service revenues into handsets is clearly desirable. Being just a feature of abigger picture is a mixed blessinggood 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 callingapplications may become spun out. These in turn can become services, products orfeatures. Digital identity will remain as a service. Ubiquity might be associated with theproduct (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.

No magic in Internet Protocol

A quick but vitally important lesson. When someone says theyve got a strategy to moveto an all-IP architecture, keep probing. What you want to know is whether theirarchitecture still has application processing embedded in the network itself, and if so

what their justification is. Its still possible to build a smart network using dumb pipes,thus recreating all the inflexibility of the circuit-switched world.

Just because its on Internet Protocol doesnt mean its done right.

Do you really need a SIP proxy? A session border controller? A media gateway? Atraffic shaper? Whats the price in terms of flexibility of the solution? Is the solution fullof mediation, but just shifted to an IP platform?

Skype has equivalents to all these functions, but not implemented as $500,000 boxes soldto telcos. Given Skype works and scales, how much value are these products adding?


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Winners and losers

The billion-dollar question: who gets the prizes from the transition to open IP networkswith open devices? The following table assumes such a transition occurs, and makes

some educated guesses as to who the winners and losers might be31

. Note that winnerand loser are the relativechanges as a result of such a shift. Some of these sectors maybe excellent or poor business prospects regardless of the direction of change.

Who Examples Winneror Loser

Why?

Handset OEMs& ODMs

Flextronics,Compal

Winner More change and innovation at the edge shortensreplacement period. Dont carry marketing costs,inventory risk, etc. in times of rapid change.

Componentmanufacturers

SkyCross, TexasInstruments

Winner Fortunes tied to that of handset OEMs.

MNVOs Virgin Mobile Winner Innovation in sales and distribution likely to bemore critical than product innovation for retail ofaccess services.

Applicationdevelopers

Jamdat Winner Massive amount of unrealised innovation potential;sticky applications with increasing returns to scalefrom community use and group forming

Software vendors Microsoft Winner Dominance of platform over pipe; localisation andapplication testing/certification.

Media contentcreators

Disney Losers? No news that peer-to-peer is a problem. Possibilityof big wins later with service-oriented businessmodels (e.g. selection of music of likely interest)

Aggregators andpublishers

Handango Winners Increased choice requires middleman to help filterand perform QA.

Access networkoperators

DoCoMo,Vodafone

Losers Unable to retain consumer surplus, facilitiescompetition, regulation.

Long-haul datanetworkoperators

Level 3, GlobalCrossing

Winner Open IP access networks will spur additionaldemand. Low margin, high volume, predictableprofit; exclusive rights-of-way (road, railway,pipeline, pylons) form barriers to entry.

Networkequipment

vendors

Lucent, Nortel Mixed Continued destruction of traditional switch andPBX business, but increased layer 1 and 2 sales

IndependentRetailers

Carphonewarehouse

Winner Likely to offer better deals than retailers tied to onenetwork

31 Cinderella is deliberately not in this list; whilst it is part OEM/ODM, it also performs value chainorchestration 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 fewstages. 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 thecourse, 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 TVspectrum for IP networks. The team has just started work and might deliveruseable hardware in 2-3 years. Scaling of mobile mesh networks is still a basicresearch problem.

Regulation. The FCCs Spectrum Policy Task Force issued its initial report onreform in 2002, and continues to modernise US spectrum policy. The UKsOFCOM has expanded unlicensed wireless spectrum by 50% in its Q4 2004review. 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 thesecond-rate alternatives (EV-DO, HDSPA, EDGE) are good enough for VoIP,even if the scaling characteristics and latency are lousy. Some are waking up tothe reality that they really are just going to be a bit pipe33.

Customers. VoIP is transitioning from early adopters to early majority. Thechasm 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 mediacontent over asymmetiric links that dont cope well with bursty two-way IP traffic. In abid to maximize bits per hertz and peak throughput its lost sight of the users needs: lowlatency, low jitter, low channel access times, predictable throughput, symmetric. Morebandwidth 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 homeand 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 networkdeployment 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 theSMS 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 coulduse their mobile phone but choose to usean alternative service (e.g. landline phone, e-mail)? What features might be added to ahandset 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) becomescommon? How could Cinderella phones be made more attractive to users, or less likely to be

32 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


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associated with outgoing nuisance messaging? How might that affect Cinderellas brandpositioning?

Q: Open Wi-Fi access points are common in the USA and Europe. What are the implicationsfor 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? Whatopportunities exist to create such services?

Q: Which Cinderella products (network as well as handset) are associated with which stagesof application development? What technologies might threaten them? How mightCinderellas 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 subsidizehandsets more in order to retain control over them? Or do they find it impossible as marginsare squeezed, and users buy open/unlocked handsets to avoid carrier tolls? Who stands togain 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 suddenlyinvented fast IP-based networks, what would the services look like when freed from pastdesign constraints? Would British callers always send you their current weather along withthe 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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Part 3: How to get thereSex Survival of the fittest

Now for the meat: what Cinderella needs to do to appeal to todays operators andtomorrows users. How does Cinderella avoid losing at football when playing against thebigger kids?

Support to the winning side

The natural reaction to a threat from the Vodafones of the world is either to fight (e.g.by trying to appeal directly to the end user) or flee (do Vodafones bidding). But arethere other options worth considering? Yes, definitely. There are some compelling, ifunglamorous, opportunities to differentiate Cinderella from other handset manufacturersand increase appeal to the carrier distribution channel.

Core tooperators

business

Network service customeracquisition & retention

Billing

Customer care

Logistics

Partnerships & alliances

Default applications andsettings

Branding

Look & feel

Retail distribution

Peripheral tooperators

business

Personalised settingsselected by user

Third party accessories

Management of user-generated content (e.g.photos)

Media content (e.g. newsclips)

Non-billable services (e.g.built-in games, addressbook sync)

Operating system

Handset form factor

Development platform

Developer program

UI framework

Handset customer acquisitionand retention

Peripheral to Cinderellasbusiness

Core to Cinderellasbusiness

Cinderellas product handset innovation is currently focused on quadrant C. Incombating the threat from carriers attention normally gets focused on quadrant B. Butthis fight over control is a win/lose proposition, and Cinderella might be the loser. Abetter approach in the short term is quadrant A, the win/win space. Cinderella can makethe carrier happier in ways that dont hurt Cinderella. Lets look at how by examininghow carriers make and lose money.

A B

C


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Service

revenues

Hardware:Network, spectrum,handsets

Customeracquisition &retention

Customercare

Figure 8 -- Abstract financial view of a carrier

Theres not a lot Cinderella can do about the hardware platform costs of carriers, bargiving 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 couldengage in.

To increase service revenues:

Increase impulse buying of MMS messages by adding one-click send of photosto most common/likely recipients.

Increase SMS to voice call up-sell by adding message at bottom of SMS displayPress TALK to call Jukka Tolonen.

Likewise from voice to video call, or voice call to 800 number to an m-commercetransaction.

Birthday marked in the calendar? An anniversary? Remind them to call!

Dont make users remember top-up call numbers, directory enquiries, etc. Etchthem on the back of the phone.

Add features that actively enable carriers to perform price discrimination. Thiscould be as simple as handsets flagging discounts at certain periods to particularindividuals for named services (e.g. MMS). (Discounting a high standard price iseconomically the same as raising a low standard price at other times, but theframing makes a world of difference in customer acceptance.)

Create handset environments and content vending services that serve toobfuscate 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 multiplecarriers and encourage on-the-spot switching, customers can message coupons toeach other).

Make handsets that encourage on-net calls by highlighting callers with on-net callrates. Make customer fear cost of off-net call rates if switching.

Build RFID tags into handsets for stock tracking.

To decrease customer care costs:

Turn the home screen into a trouble ticket tracking facility; avoid customerscalling 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 examplesthan the few I have thought up. The key thread is that these all treat the carrier as thereal customer, with (on average) no loss of welfare to the end user in theirimplementation. This has the additional benefit of sweetening some bitter pills thatCinderella might try to feed to operators.

Dont play with their network ball

So weve rejected a head-on assault on carriers, and looked at ways of putting some

lipstick on the operator-controlled pig. What other alternatives are there in dealing withoverbearing carriers and a lack of open IP networks? Well, you cant lose at football ifyou play tennis insteadjust play a different game to the carriers.

Theres a world of communications over short distances that is unappealing to carriersbecause it doesnt fit their business model of building networks and creating billableevents. This would include gaming over IR or RF links, Toothing, picture exchange,contact swapping and comparison, m-payments, proximity adverts, and security IDsystems. What are the untapped social and commercial opportunities of RFID, andother near-field RF34? How much priority do these receive in Cinderella today comparedto more traditional network-centric investments?

Cinderella is already experimenting with adding non-network features such as haptic(touch) interfaces to devices to help differentiate them35. Weve seen hand-waving LEDmessage boards36. The ultimate in new features is to import the whole functionality ofother devices into converged handsets. Weve already seen MP3 players, satellite37 andFM radio, and games consoles take this route. They only avoid the carrier bottleneck tothe extent that the content is delivered by means other than the carrier network.

34 For more examples see http://www.cioupdate.com/trends/article.php/3442591

35 http://www.thefeature.com/article?articleid=101249&ref=11558418e2a754cab1315d2193ddc3b9::342736 http://www.smartmobs.com/archive/2004/05/31/wave_messaging.html37 http://www.engadget.com/entry/1234000660022392/


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Be the best footballer

I could flatter myself by suggesting Cinderellas already got a better team physiotherapistby hiring me. But then how to play superior football against a strong opposition?

Assume theres a growing world of open networks on which to deploy innovative IPapplications. What are the likely criteria for success? No doubt Cinderella has receivedendless excellent external and internal advice on this matter, and it is with somereservation I submit my own thoughts. Based on my reading, winners are more likely toemerge if they align with the following interlinked trends. But that doesnt excludesuccess coming from other directions.

Trend #1: Communication over content. If you havent read the seminal paperContent is Not King38 then I suggest you make it your

Geddes - Stupid Network

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