Monday, 24 May 2010

A realisation about the IPTV tech market

It struck me earlier today that the nascent market in unscheduled, IP-delivered TV is a bit atypical for a capital-intensive new product.

There are literally hundreds of different products that do the same thing. Each broadcaster has gone down their own path at great expense, and has been joined by aggregators and a few relatively small tech' players (Brightcove, ThePlatform and the ill-fated Maven Networks, to name three).

There is limited standardisation in technology or approach. I've talked to broadcasters, tech companies and Telcos - the future could be big, heavy infrastructure or a customer-centric interface with simple underpinnings. Even though the codecs are based on similar principles, they seem unique in flavour to each platform. The only thing they agree on is that 'on-demand' will one day be a larger proportion of viewing than linear. Incidentally, this is the only thing I'm convinced isn't true!

This has confused me for a while. Until today, when I talked to a big content creator, who explained it succinctly. The big players want to master the new form of delivery and monetisation themselves before they consider sharing or outsourcing it. Knowledge, it would seem, is worth more than industrial logic...

Friday, 14 May 2010

Lots of clouds, but what's the weather like?

I attended a live video stream of the Future in Review conference on Wednesday. Although the format was unusual (even with a cinema screen and surround sound), several comments made by the speakers caught peeked my interest.

During a conversation on the network implications of cloud services, it occured to me that the storage and processing of vast amounts of data in a central location is going to lead to significant latency problems. This in itself isn't great insight. Neither is the fact that network management is going to lead to distribution of content and processing around the edge of the network, based on statistical analysis of likely usage.

I started wondering, however, whether that distribution is going to lead to 'systems' of usage, similar to the weather systems in the Earth's atmosphere. The Brownian motion of particles in the atmosphere is in some ways analagous to the 'motion' of packets in IP networks, with rate shaping and the variable speed of networks acting similarly to the effects of thermal currents on land masses (in my head, anyway!).

The implication of this would be that congestion would build chaotically in certain geographic locations of the network as demand builds, causing localised speed changes and service degradation as resources are pulled from deeper in the network to cope with demand. Digital weather, if you will.

Predicting this weather could become an industry in itself. Organisations wishing to use the cloud in a particularly intensive manner (transfering large volumes of data, running complex simulations or applications) will need to forward plan in a more sophisticated manner than with a traditional utility. Suffice to say, predictions of this complexity are difficult to make at the best of times and may even require distinctly un-cloudy technology such as super-computers to execute in a timely manner... or perhaps the cloud itself can solve its own problem with utility computing. Time will tell.

Alternatively, I could have missed the point! Any observations greatly appreciated.

Thursday, 13 May 2010

Impacts of a handset leasing model on mobile telcos

Following yesterday's post, here's some related thinking on the impacts on operators of handset leasing.

Handset sales represent around 25% of operator revenues in a typical European market, but generate only around 5% of margin. It may therefore be the case that the scenario described would lead operators to a more profitable structural model than exists today. Oil companies are consistently and acceptably profitable, despite being (literally in some cases) the ‘dumb pipe’ that operators are so desperate to avoid becoming.

One of the reasons for the oil majors sustained profitability is clear focus on their role in the value chain – to supply the fuel that enables transportation, relying primarily on location, then brand and finally product innovation to compete. BP or Shell do not need to subsidise the purchase of a car in order to drive consumption of fuel because consumers are ‘hooked’ on it (it gets them from place to place) and there are many credible car manufacturers and dealerships that can serve every conceivable way that people want to travel. The same is now true in mobile devices.

Separation of the service business from handset retail enables operators to focus on the services that are driving the real value on their platforms and optimising the network that may come to differentiate them as data usage ramps up. Although losing the privilege of locking handsets to their network may be frightening, in truth it is no more impactful than number portability in enabling consumer choice.

Furthermore, there are operational advantages for operators in doing away with handset retail. Inventory management and store infrastructure could be streamlined, with a much greater proportion of customer interaction coming through self-service. Call centre interactions per customer are also likely to fall as handset-related queries are reduced.

Following the analogy, the one thing that operators should not do is lose the differentiation that the geographic reach of their network affords them by separating the netco from the servco. Although fuel stations are often clustered around points where there is a large amount of traffic, they do not share facilities as their strength in a location is a key competitive differentiator. This suggests that despite its cost advantages, network sharing may not be a good strategic move for mobile operators.

Moreover, the power of the new wave of handset manufacturers - exemplified by Apple - over the industry would be reduced. No longer would it be down to operators to sell customers on unpopular 18- and 24-month contracts in order to fund access to a handset. Instead, the manufacturer can worry about that retail and pricing aspect, leaving the service provider free to focus on obtaining a share of the increasing data market that would likely result from cheaper access to smart phones.

Wednesday, 12 May 2010

More on the parallels between personal transport and personal communications

I've been doing some more thinking about what the mobile industry could learn from the automotive. See what you think:

The parallel between personal communication and personal transportation

Although outwardly very different, mobile telephones and automobiles actually offer a similar consumer proposition, in that they provide a means of obtaining services, doing business and, most importantly, maintaining social contact. Both are a personal choice, as the vast range of styles available in each market demonstrates; moreover, both started out as niche, expensive fancies and have matured into mass market items.

If automobiles and handsets are analogous, then there are also clear parallels between the mobile network and the network of fuel stations that support car travel. Both networks are spread out to provide coverage over a wide area and both have economics that vary significantly from location to location. One could even suggest that the recent interest in wi-fi bypass to increase the efficiency of data supply is akin to the almost simultaneous development in hybrid automobiles, intended to increase fuel efficiency.

How handset manufacturers could become more like auto makers

Despite similarities in the underlying model, there are significant differences in the structure of the two industries. Mobile operators are still largely vertically integrated sell handsets direct to the consumer. Conversely, the automobile industry is split into manufacturers that build and sell their range through their own dealerships and oil companies, which sell fuel through their own channels, entirely separate from the auto-makers.

If the latter model were true in the mobile phone industry, then it would see Nokia shops on every high-street, competing for consumer attention with Samsung, Sony-Ericsson et al. Consumers would purchase a handset from one of these outlets, then choose a network provider. Handset manufacturers have attempted this business model before, but have met with limited success, principally because they have not included two key lessons from the auto industry in their consumer proposition – finance and trade-in.

The importance of finance and trade-in

Today, basic financing is built into mobile phone contracts to spread payments over a long period and hence enable the consumer to afford an item that, it should be remembered, often costs as much as a flat screen TV or personal computer. The auto industry is more sophisticated, offering leasing and balloon financing as well as spread payments. The former solutions may also be valid for mobile phone manufacturers, as they enable consumers to have a device from the most current range most of the time and offset the high initial purchase price that may have dissuaded consumers from direct purchasing in the past.

A crucial part of the success of balloon or lease financing is the retained value of a handset. Although it is rarely considered when they are superseded and put away in a drawer, handsets do have considerable retained value. It is true that depreciation is faster than it is for a car – a high end Nokia loses about 50% of its value in the first 2 years, whereas the average car loses 50% over 3 years. Thereafter car depreciation tends to slacken off, whereas the phone will plateau for a time, then drop precipitously. Even so, the secondary market for 1-3 year old handsets is strong in developing markets and is likely to remain so as a billion or more consumers come on stream in India and China.

To build a proposition around finance a manufacturer must understand and be able to control the lifetime value of the handset in order to set the lease price. By leasing the handset and offering an option to purchase at the end of the lease term, consumers are incentivised with a lower monthly charge compared to that offered by a mobile operator. Divorcing devices from the service that enables it also increases customer choice, particularly benefiting pay-as-you go customers who have limited access to high-end smart phones.

Using benchmark prices for handsets and retained value, we anticipate a manufacturer could offer a 30% discount on the cost of a handset and 12 monthly upgrades for a gross margin of around 50%. This is compared to today’s gross margin on handsets of c.25%.

Impact on the operating model of manufacturers

This model has significant impact on the business model of handset manufacturers, since it entails them becoming customer-centric retail organisations, able to manage a direct, long term relationship with their consumers. In such a business, consumer finance, credit checking, billing and collections will become major operational processes.

Two key challenges should be highlighted. Firstly, since the model depends on retained value of handsets, consumers must be helped to unlearn engrained behaviour around handset ownership and robust processes put in place to ensure handsets are returned.

Secondly, an apparatus would be needed to match supply and demand on the returned devices. This is akin to a commodity market and may function best in an environment where many manufacturers are using the same business model, thereby creating a rich platform for buyers and sellers. It should be noted that the WEEE regulations in Europe may mean that collection and recycling of devices is in fact compulsory for their vendors, meaning that such a trading platform has a place in the today’s market as much as in the scenario we present here.