[IP] Truth from the best analyist of the Euro Telecom industry existant - James Enck of Diawa Securities London
Begin forwarded message:
From: Richard Shockey <richard@xxxxxxxxxx>
Date: October 13, 2006 8:33:11 PM EDT
To: dave@xxxxxxxxxx
Subject: Truth from the best analyist of the Euro Telecom industry
existant - James Enck of Diawa Securities London
Reply-To: richard@xxxxxxxxxx
See James Enck's blog at
http://eurotelcoblog.blogspot.com/
Monday, October 09, 2006
Ten things I hate about you (aka the carriers )
Last Wednesday the organizers of the Telco 2.0 event were kind enough to
give me the opening presentation slot on day one, which was intended
to set
the scene for a lot of what was to follow. In the run-up to the
event, I had
thought long and hard about what sort of approach to take, but given
that I
only had 15 minutes to get some complicated messages across, I
decided the
best way would be to come up with a sort-of laundry list of things in
telecom which cause worry, discomfort or pessimism among investors. The
intention of this was to highlight some weaknesses which could also be
interpreted as potential opportunities, which we could expand on over
the
course of the two day event. I also thought it was essential to get
people's
attention, and to deliver what was a pretty threatening message in a
palatable and humorous fashion. What I came up with was "Ten Things I
Hate
About You," (torrent version here), and it goes something like this
(follow
along if you like - the slides won't make much sense on their own).
1) Telcos have lost control of their core product - The old gags are
usually
the best, so I took the opportunity once again to trot out the
supermarket
photo from Norway, with voice and frozen peas in a battle-to-the-
death for
prime loss leader item in this market with one VoIP service provider for
every 15,000 households. (I was surprised and flattered later in the
morning
when the photo also turned up in the presentation of Berit Svendsen from
Telenor fixed line - wonder if she knew it came from a Telenor
employee?) I
then asked for a show of hands of people who had heard of RTC
Factory, and
only one person raised his hand, but then again he was the one who
introduced me to the company in the first place, so this was no
surprise.
Quite a few people seemed to shake their heads in smiling shock and
awe when
I repeated the company's claim that it can give you (or anyone who
can pay)
a telco in a box with eight weeks' lead time. If investors like to see
markets which enjoy significant barriers to entry, then this ain't
one of
them. I suggested that this implies that telcos need to think about
trying
to monetize the context around phone calls, rather than the billable
event
itself. Obviously, I said, there are others who are trying to do this
already (the pay-per-call brigade and Gizmo Project's trade off of PSTN
breakout in return for your real-world contact data), so get out
there and
rethink the value in the call. (During the feedback session, there
seemed to
be intense interest in what Gizmo was up to.)
2) Voice is becoming a feature, not a service - Here I called
attention to
the Busta widget on my Google homepage, as well as touching on some
of the
other early stage developments around embedding voice in web
communities,
virtual worlds, gaming, etc. Given the intensity of use that many of
these
generate, there is every reason to assume that the communication tools
integrated within them will grow richer, and probably fast. One
strategy for
the telco on the outside, is to get on the inside, by providing the
voice
platform to these communities. If it's going to have voice anyway, it
might
as well be your platform which runs it. So far it has been the
newcomers who
have tapped into this trend.
3) Telcos can't grasp that consumers may not want what they're being
sold -
Here I observed that 45% of KPN's first half DSL customer growth came
from
the Direct ADSL tariff, which is basically raw connectivity with no ISP
service, and now accounts for nearly 20% of the total customer base. I
suggested that this seemed to be a validation of the increasing role
that
web services are having in the lives of ordinary consumers, and also
seems
to underline that where they are given a choice, many may choose to
avoid
telco-mediated services entirely. If I have 85 Gmail accounts, VoIP
from a
number of sources, a free blog, and theoretically unlimited online
storage
at my fingertips, what do I need an ISP for? The obvious message for
telcos
is that if people want dumb pipes you should sell them dumb pipes as
efficiently as possible, and (as John Waclawsky from Motorola stated the
next day) construct a strategy for capturing value at the edge.
4) Telcos thrive on scarcity - future value will be built around
abundance -
Here I gave as one example MySpace, which basically is an experiment in
giving tens of millions of people simple site design tools, a lot of
free
storage and bandwidth, then standing back and seeing what happened. A
lot of
people laughed at the $600m price tag NewsCorp paid last year, but the
Google advertising deal alone is worth $900m, so who exactly is the
fool?
Another example I gave was the Amazon S3 project, which opens up
unlimited
affordable storage to people who wouldn't normally have access to it,
and
was already enabling the creation of some high-quality sites.
5) Command and control culture is dead, open APIs rule - Here I
focused on
the classic walled-garden business which used to be AOL, before
getting the
open API religion. I also pointed out that as part of AIM Pages,
users can
build modules which import content from services offered by AOL's
"mortal
enemies" elsewhere on the web. I got distracted by my ticking watch and
actually forgot to mention perhaps the most compelling recent
example, which
is Amazon.
6) Telco DNA is fundamentally unsuited to the current dynamics of
content -
Here I pointed to the example of YouTube, which serves in excess of 100m
streams per day, but where the most subscribed channel of all time,
lonelygirl15, has only 48k subscribers and first appeared on the site
five
months ago. Think about this, the musings of a teenage girl appear on
the
site, and in almost no time become the most subscribed channel in the
site's
history, but this auditable base of subscribers is tiny. To make
things even
more difficult to interpret, lonelygirl15 was subsequently revealed
to be a
stealth project by aspiring filmmakers. The audience particularly
seemed to
like the quote from one of them that all it took to make the videos was,
"Two desk lamps (one broken), an open window and a $130 camera." I
stressed
that this sort of formula might well appeal to content companies or
advertisers seeking innovative marketing strategies, but that if telcos
found getting sports content a challenge, then this sort of dynamic
could be
a graveyard. Then again, who ever said that user-generated content
had to be
so US-centric? Can't telcos try to enable something more relevant to
their
home markets? So far, a lot of the weight is being carried by
independent
players, but on the positive side, one thing I noted was that it was not
unprecedented for telcos to engage communities in the creation of
locally
relevent content, and benefit the core business in the process.
7) Telcos expand their footprints physically, not virtually - Readers of
this blog will note the frequency with which I have talked about
mutually
assured destruction, which I think we are seeing play out among the
big four
PTTs in Europe. However, the question at the back of my mind is, why
didn't
a telco, maybe one with a relatively small footprint (Belgacom,
Swisscom,
BT) buy Skype? Why did it take eBay (and the other three or four
internet
players reportedly involved in the auction) to see the value of what
Skype
had to offer? Of all people, surely telcos should have seen what was
happening and bought the company out at an earlier stage. Maybe some
tried,
but if so it went completely unreported, which probably is a good
indication
that no one tried. Ditto for MySpace - why was it Murdoch and not a
telco? I
could see the audience squirming, but I quickly pointed out that this
was
not as stupid as it sounds. SK Telecom had the good sense to buy
Cyworld,
which has become both an exportable, licensable platform, a generator of
incremental revenue ($125m per annum in virtual goods), and serves to
stimulate usage of the core asset base.
8) Telcos can't innovate - I guess this one was the proverbial duck
in the
barrel, given how few companies even bother to disclose R&D
expenditure. I
repeated Sir Terry Matthews' exhortation from VON Stockholm that telcos
should get away from an obsession with bullet-proof reliability and
be more
adventurous in product development. Ironically, many of the people in
the
audience are in fact engaged in innovation efforts, and they are damned
smart. However, I guess the issue of innovation is about much more
than R&D
if the overall organization is not driven by innovation, and some
parts may
even be openly hostile to it. This seemed to be a common theme of the
feedback coming in towards the end of the conference - the people
attending
such an event would naturally be more amenable to the need to change the
model, to do things differently. The real challenge was in convincing
the
other 99,000 people in the organization of the same. Anyway, I
inevitably
mentioned what many have called Google's spaghetti strategy (throw it
against the wall and see if it sticks), which I think the audience
appreciated as something to strive for, but probably impractical. (I
noticed
with interest the feedback which followed Jim Holden's presentation
about
Google's partnership strategy in the wireless space - a lot of it
betrayed a
level of suspicion and mistrust of the "step into my parlour said the
spider
to the fly" variety. This was similar to the response to Google at
the TEN
event back in June. Is there any company which instills greater fear in
telcos than Google? I've been pondering this for a few days now, and am
coming to the conclusion that Google may represent for telcos some very
threatening ideas - a company which encourages innovation even when the
direct connection to the core business may be unclear or non-existent, a
company which believes in the option value of innovation investment.
This is
alien territory for the modern telco, and it's made even more galling by
virtue of the fact that this innovation effort just happens to be
bankrolled
by $6bn in annual advertising revenues. Moreover, I think that Google
encapsulates a telco awareness that the garage around the corner may
give
rise to something which could wipe you out.)
9) Telcos shouldn't try to innovate - Here I was trying to convey
that some
investors believe the battle is already lost, and that telcos should
concentrate on things they know how to do relatively well - building and
managing network infrastructure - and reposition themselves to enable
the
explosion of content and application innovation at the edge. The
problem is
obviously the need to sack tens of thousands of employees as a
result, which
may be untenable in a number of cases. However, I made the
observation that,
for companies like BT and KPN who report in such a way that investors
can
get some insight into divisional profitability, it is clear that the
unsexy
utility network business contains a lot of value. Based on BT's restated
numbers from last year, Openreach and Wholesale accounted for 70% of
positive operating free cash flow (EBITDA minus capex), and wholesale
was
77% of the equivalent figure for KPN's fixed business in 2005. There are
investors who would prefer exposure to this sort of business alone,
rather
than the IPTV-aggregating, me-too-softphoning service provider business.
10) Maybe the entire foundation is wrong - I had to close out with my
current nagging question over the tension between broadband as a
"product"
(you know, the standard marketing pitches about blazing fast
downloads...)
and broadband as a lever of social policy and local economic
self-determination (torrent version here). The access model as it is now
clearly encourages and enforces artificial scarcity, when in fact
what might
be needed is something entirely different. If so, that means we have
adopted
the wrong model and invested heavily in it. A fairly downbeat topic
to close
on, but luckily, as we were out of time I didn't get to the part where I
suggest that the entire privatization process might have been a
miscalculation. Maybe next year...
Permalink posted by James Enck : 4:20 PM
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