Truth from the best analyist of the Euro Telecom industry existant - James Enck of Diawa Securities London

Begin forwarded message:

From: Richard Shockey <[email protected]>
Date: October 13, 2006 8:33:11 PM EDT
To: [email protected]
Subject: Truth from the best analyist of the Euro Telecom industry  
existant - James Enck of Diawa Securities London
Reply-To: [email protected]


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