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Several telecom operators to run into financial problems in the next three years…

November 21, 2014 Leave a comment

In 2017 several telecom operators will run into financial problems, with Vodafone being the most known, unless they start changing today. Why?

The telecom business is a very capital intensive business. Buying spectrum, rolling out the next-generation mobile networks and bringing fiber connections to each home and business is extremely capital intensive. Traditionally operators were the main users of their networks and got large margins on the services that ran on top of them. The truth today is that telecom operators have been completely sidetracked. They no longer have any control of the mobile devices that are used on their networks and neither the services. Data is growing exponentially and is already clogging their networks. A data tsunami is on the horizon. Operators see costs ballooning and ARPU shrinking. There is no way they can start asking substantially more for broadband access. Obama just killed any hope of adding a speed tax on the Internet. The EU wants to kill juicy roaming charges. However the future will be even worse.

New disruptive competitors have entered the market in recent years. Google Fiber is offering gigabit speeds both for uploading and downloading. Youtube and Netflix are generating the majority of Internet traffic in most countries.  Most streaming videos are broadcasted in SD quality. However Netflix is already broadcasting in 4K or ultra high-definition quality on Google Fiber. This means traffic volumes of between 7 to 19GB per hour depending on the codec that is used. Take into account that often different family members can be looking at two or more programmes at the same time. The end result is that today’s networks and spectrum are completely insufficient. Now add the nascent IoT revolution. Every machine on earth will get an IP address and be able to “share its feelings with the world”. Every vital sign of each person in the richer parts of the world will be collected by smart watches and tweeted about on social networks. 90% of the communication that is running inside Facebook’s data centre is machine to machine communication, not user-related communication. Facebook hasn’t even introduced IoT or wearables yet. You can easily imagine them helping even the biggest geek with suggestions on which girl to talk to and what to talk about via augmented reality goggles and with the help of smart watches. Yes it is a crazy example but which telecom marketing department would have given even $1 to Zuckerberg if he would have pitched Facebook to them when it was still known as TheFacebook. It is the perfect example of how “crazy entrepreneurs” make telecom executives look like dinosaurs.

This brings us to the internals on how telecom operators are ran. Marketing departments decide what customers MUST like. Often based on more than doubtful market studies and business plans. In contrast the mobile app stores of this world just let customers decide. Angry Bird might not be the most intelligent app but it sure is a money maker. Procurement departments decide which network and IT infrastructure is best for the company. Ask them what NFV or SDN means and the only thing they can sensibly response is an RFP identifier. Do you really think any procurement department can make a sensible decision on what network technology will be able to compete with Google? More importantly make sure these solutions are deployed at Google speed, integrated at Google speed and scale out at Google speed? If they pick a “Telecom-Grade Feature Monster” that takes years to integrate, then they have killed any chance of that operator being innovative. With all the telecom-grade solutions operators have, why is it that Google’s solutions are more responsive, offer better quality of service and are always available? Vittorio Colao, the Vodafone CEO, was quoted in a financial newspaper yesterday saying Vodafone is going to have to participate in the crazy price war around digital content because BT has moved into mobile. So one of the biggest telecom operators in the world has executive strategies like launching new tariff plans [think RED in 2013], pay crazy money to broadcast football matches, bundle mobile with fixed to be able to discount overall monthly tariffs and erode ARPU even more, etc. If you can get paid millions to just look at what competitors are doing and just badly copy them and dotcoms [the list is long: hosted email, portals, mobile portals, social networks, virtual desktops, IaaS, streaming video, etc.] then please allow me to put your long term viability into question.

So can it actually be done differently. YES, for sure. What if operators would enable customers to customise communication solutions towards their needs. Communication needs have not gone away, if any they augmented. Whatsapp, Google Hangout, etc. are clear examples of how SMS and phone calls can be improved. However they are just the tip of the iceberg of what is possible and what should be done. Network integrated apps via Telco App Stores would give innovators a chance to launch services that customers really like. Hands up who would pay to get rid of their current voicemail? Hands up who really loves their operator’s conference bridge and thinks it is state of the art? Hands up who is of the opinion a bakery is absolute not interested in knowing what its customers think about its products after they have left the shop?

Last week the TAD Summit in Turkey had a very special presentation from Truphone, one of the few disruptive mobile operators in the world. No wonder it won the best presentation award. Truphone, with the help of partners, deployed a telecom solution in minutes that included key components like IMS, SDP, HLR integration, one hundred numbers, dashboards, interactive voice responses, etc. Once deployed, the audience could immediately start calling and participate. All numbers of the people in the audience, their home operator, the operator that sold them their SIM initially, their age and responses to interactive questions were registered and results shown on a real-time dashboard. If the audience would have been in different locations, they could have been put on an interactive map as well. The whole solution took only a few weeks to build with a team of people that all had day jobs. The surprising thing is that it was all build with open source software. It is technically possible to innovate big time in telecom and bring to market new services daily. All at a fraction of today’s cost. The technology is no longer a limiting factor. Old-school thinking, bureaucracy and incompetence are the only things that hold back operators from changing their destiny. Whatever they do, they shouldn’t act like former-Nokia executives in some years and tell the world that Android and the iPhone took them by surprise. Dear mister operator, you have been warned. You have been giving good advise and examples of how to do it better. Now it is time to act upon them…

Amazon AWS will continue to compete with its best customers…

If you thought Amazon’s Prime Instant Films is just an exception of Amazon trying to compete with its best customer then you are wrong. This is not an exception but a rule. Simon Wardley just explained why Amazon is fast following their best customers and why more companies should do it to, even in the physical world. The summary is:

If you don’t want to launch a 100 new services and assume failure on 90-95, then let others launch thousands and you commoditise the successful innovations.

So what does this mean?

It means that if you are a young startup that builds everything on AWS then they will just look at the traffic that goes through your servers. If all of a sudden they see that you are picking up more traffic then anybody else, then they will launch a competing solution shortly that commoditises your business. Since they have access to your solution they can actually look inside and see how it works and redesign a more optimised solution.

How to avoid your service to be commoditised by a fast follower?

First of all move faster than anybody else. Full automation is key. If you are faster to respond to customer’s needs then you will attract all customers in a winner takes it all market. Also follow lean startup and A/B testing. Do continuous experiments and only scale up engineering on a new feature after it was demonstrated to be successful with customers on a small scale test.

Second, don’t build for one cloud, build for multiple clouds. If you use cloud orchestration solutions that allow your solution to be moved from one cloud to another one then you are less likely to be trackable by one cloud provider. Treat the cloud providers like they are commodity and move your workloads where it makes more financial sense. Whatever you do, don’t get locked-in by some proprietary services because you will have a hard time moving out. Just ask Netflix how they feel about having their platform ran on top of their biggest competitor’s infrastructure without a chance of moving a way soon. Don’t want to be in their shoes? Use a cloud orchestration solution. Don’t know any open source? Check out Juju

Third, assume you will have fast followers when you start so try to put barriers of entry in place. A good strategy would be to build a business on top of a network effect. Examples: Facebook has over 1 billion users. The more users the more synergies. Even if you would steal away all the code from Facebook and launch Headbook you would not be successful. Network effect businesses tend to be a winner takes it all markets as a consequence. The other counter intuitive strategy is to strategically open source parts of your solution. If you open source parts of your solution then there is nobody that can offer a “cheaper” solution then your freely available solution. So the incentive of building another solution to compete with a free solution is low. Additionally you will get contributions from others hence your team will be able to run faster than anybody else. Finally open source does not mean zero revenue. Netflix has open sourced their architecture. This means they lower their cost and higher their innovation speed but since you don’t have access to their content library and the multiple content they create themselves, it is extremely hard to compete with them. So open source those parts that help your strategy…

The signs of getting disrupted…

How do you know if your company is making billions but is about to be disrupted? Imagine you were working at Nokia some years back and you just made a record year but at the same time both the iPhone as well as Android were going viral. If you would have known back then what the future had in store, then you would have switched to Samsung, Google or Apple and would now be an affluent star instead of a jobless dinosaur. What are the 5 signs you should have picked up?
1. Viral competitors
If your competitors are having more potential customers than they can cater for and your company hasn’t: red alert.
2. Lack of leadership
Can you name any Nokia CEO before Elop? [Author of the worst CEO email ever, the one about leaving the burning oil platform but offer no place to go].
3. Many new products but no successes
Remember the first touchscreen Nokia phone. I can not belief anybody liked that product.
4. Growth by expansion
Nokia was growing revenues not because they sold more units in Europe or the US but because they expanded very aggressively globally. Their money maker was their most basic product line that was sold in developing countries. This was in contrast with their competitors that were growing like crazy in Nokia’s key markets.
5. Old technology that is not user friendly
Remember those J2ME times. You wrote apps and packed them in a format that in theory could work everywhere. However users would have to be very persuasive to actually install your application because they would go through several scary dialogues about them really being sure they wanted to install this package.

Who is working in the next Nokia?
Any telecom employee!
1.Viral competitor: viral Facebook/WhatsApp and Google/Hangout
2. Leadership: Except for Cesar Alierta, name 3 telecom CEOs?
3. New products: any new products your operator launched that you were not ashamed to show your friends? Anybody???
4. Growth by expansion: Telefonica’s cash cow = Latin America. Spain is economically dead for them. WhatsApp is growing strong in Spain.
5. Old technology: SS7. No further argument needed.

Any other industries?
Retail vs. eCommerce [Bezos against the world]. Retail banking vs. PayPal/Stripe/Square/etc. HP/Dell/IBM vs. AWS/Azure/etc. VMWare vs. OpenStack.

Next steps?
If you think/know your company or industry is on the list, then nothing better to do then to start crafting your CV and to get up to speed on the competitor’s innovations. Several ex-Nokia experts found good jobs at Apple and Google in the early days. Waiting means you get to see how a new CEO can burn down a successful empire in 24 months…

Bye bye WAC, hurray Twilio

In the same week Twilio announced global SMS delivery, WAC was declared a failure.
Was it a surprise? Not really. Developers want simple APIs that are cheap and global. Twilio offers this, WAC does not. Are operators learning anything? The answer is they are not.
Telecom dogma 1: Users will not use a service that is not a global standard.
Internet response: proprietary APIs.
Telecom dogma 2: 99.999% availability with expensive hardware and Oracle RAC is the only way to launch a telecom service.
Internet response: Amazon and Rackspace virtual servers and MySQL.
Telecom dogma: I am the king. I put prices and users have to pay them.
Internet response: $1/virtual number, $0.01 SMS/call per minute.
How can a company with less than 100 employees offer better pricing than the actual network owners?
Operators are thinking ROI in 6 months and then ask what users might like. Internet players launch something simple and cheap, get continuous feedback and improve the service. In 12-36 months they dominate the world.
Know any bad service on the Internet that had a good ROI in 6 months? If you do not provide what users want, ROI will be a lie in your Excel. Forget 99.999%, forget RFPs, forget 40-70% revenue shares, etc. Either you innovate and launch in 3 months with daily improvements afterwards or you will not be an Internet player. The alternative is being a bit pipe. But even there Freedom Pop, Free.fr, Google FttH, etc. might spoil ROI…

Is IaaS a good business for operators?

The short answer is no unless you operate in a part of the world where there is no regional IaaS. The longer answer is:

Amazon is running their AWS services with a cost-plus pricing model. This means they aim for a 10% profit margin. Every time they have improvements in their economies of scale, they lower the price to get back to the 10%.

Although Amazon has healthy gross-margins, the IaaS is all about investing in hardware and R&D. This means that volume is the name of the game. Although Amazon is making IaaS into a billion dollar business, the number two player (Rackspace) is around $285M for their IaaS business. This shows the winner-takes-it-all.

How are operators going to compete?

Competing at price with Amazon AWS, Rackspace, Gogrid, etc. will not be an option given that they are lowering pricing continuously.

Competing with better technology is also almost impossible because Amazon is THE marketleader for IaaS innovation with services like DynamoDB. IT players are just doing catch-up and any operator that will use an RFQ process will just be buying previous-generation-software and hardware. This means in Cloud terminology: legacy systems.

Operators could give better SLAs then the 99.95% offered by Amazon. However in the world of cloud computing, SLAs do not mean anything. If you want availability, then you are better to implement a multi-cloud strategy in which you use multiple cloud providers and your software can move dynamically between them.

Trust? IBM and other IT players can provide that as well. They have been in the Cloud space for more time then telecom and are quicker at deploying technology.

Networking reliability, QoS and speed? Yes but only for a niche segment of the market. A segment that is unlikely to be big if you look at the local nature of most operators.

Geo-localization reasons? YES. This is probably the only valid reason why in Africa, some parts of Asia and Latin-America, operators should look at IaaS. However in Europe, the US, Australia, Japan, Korea, Singapore, etc. this can not be the driver.

So unless you are targetting some very specific low-latency or high data volume nice markets or are in a part of the world where reliable networking and electricity is hard to get, you are unlikely to make your CEO happy with IaaS. You should think about other parts of Cloud Computing like PaaS, business processes as a service, networking as a service, etc.

Disruptive Innovations that can Kill the Telecom Industry

February 14, 2012 1 comment

Killing the mobile broadband oligopoly

For years operators have paid billions for spectrum. Millions of man-years have been spent on building standards like GSM, GPRS, CDMA, 3G, LTE, etc. Can disruptive innovation kill this in a few years?

Yes, it can. The FCC is finding out that large parts of the USA are still not covered by mobile broadband. After years of lobbying by groups like the New American Foundation, the FCC has finally decided to start with White Spaces. White Spaces are also being rolled out in the UK.  White Spaces allows spectrum to be opened for public usage, which was previously used by analog television or to separate different adjacent channels. White Spaces have been referred to as “WiFi on Steroids”.

Another disruptive technology is software-radio networks in which mobile devices use software-driven radio technology instead of hardware-driven radio technology. This allows a mobile device to be compatible with different standards and to switch and evolve quickly. Putting software-radio in a mobile phone will make it possible to use dynamic white spaces, in-door networks, etc.

A final disruptive technology is Openflow. Openflow, is part of software-driven networks, in which routers, bridges, firewalls, loadbalancers, etc. are implemented on software-level. Networks can be virtualized and used with different QoS and configurations at the same time.

Google and Microsoft are major backers of the White Spaces initiative. They also control two important mobile operating systems. Google is also running pilots with fiber-to-the-home. Google has its own routers and other network technology.

Google could easily be the first White Space operator and use a Fon-like way to roll out their network.

Killing ARPU

SMS is already death, and it will be just a matter of months before operators will see deep dives in revenue. Apple could make the iMessage protocol public and Android could come with a standard iMessage-enabled solution and people would no longer send SMSes but would not even realize it.

Next one on the list are calls. Roaming is already seriously being challenged for years by Skype and others. Operators are planning for VoLTE, or voice over LTE, only by 2013-2014. However most will start rolling out LTE in 2012. This is the ideal situation for Voxtrot, and others, to use the vacuum to get people accustomed to free calls. By the time VoLTE will be available there might just be one market price for it: FREE.

Other value-added services, are already being substituted. MMS is called Twitter & Facebook mobile app now. PBX are now on the Cloud. Call centers are now offered as a service.

Killing ROI

Operators are pushed by the market to invest in LTE roll-outs. However why would you need LTE? There is not a single operator service at this moment that will make people queue up in front of their stores to get an LTE subscription. There are a million and one reasons in the form of mobile apps, mobile video streaming, social networks, HD Video-calls, etc. that can push customers towards the over-the-top-players.

So network investment is only going to rise and revenues from the new technologies will be meager at best, if not cannibalizing high-ARPU services.

With Mega Upload and other sharing sites being disabled, illegal file-sharing is not going to go away. P2P is likely to come back with a vengeance. It is easy to shut down large sites. However what if special encrypted P2P apps are used to distribute the location of content and botnets for distribution. There are a lot of computers that are connected to the Internet but are badly secured. Instead of using them for spamming, Mega Upload 2.0 services can use them to store and distribute content. As long as these “hacked” computers use HTTP(S), it will be very hard for operators to distinguish regular do-it-your-self websites from illegal content hubs.

Killing the operator’s established business model

Operators have educated subscribers that everything that comes from them has to be paid for. Disruptive operators like Free.fr are undoing this education by giving a lot of services for free when you pay the monthly subscription fee.

The Freemium business model is likely to find its way into the telecom industry. The model in which 90-98% of the users get the service for free and 2-10% generate the revenue by purchasing premium services. Combined with advertisement, this is the model of big successes like Zynga, Linkedin, etc. Disruptive players that adopt Freemium are likely to start offering services outside of their country borders since the more people participate, the better. With a winner-takes-it-all business model expect roll-outs to be very aggressive.

What can the telecom industry do?

The first thing operators should do it to tell their providers that their top problem is the lack of new revenues that will sustain the industry. Not LTE roll-outs, not fiber-to-the-home, not customer experience management, etc.

Telling telecom providers that new revenue solutions will be a top priority for 2012 will shift R&D budgets into the right direction.

The second thing operators should do is to stop using their existing purchasing techniques to try to generate new revenues. Nobody will be able to invest 5 months into an innovative solution, spend 3 months doing business development, pass 3 months on filling out RFIs, pass another 4 months filling out RFPs, 2 months on contract negotiations and 6-8 months on delivery. The industry can not wait 2 years to launch the first solution. Especially the herding nature of operators is making any introduction of new innovative services difficult because everybody wants a market leading solution but nobody is willing to be the early adopter.

The response should be different. Joint innovation teams that are able to break the “established rules”; that are able to launch “beta-quality” services to early adopters; that are able to innovate with both technology, business model and go-to-market strategy, etc. Operators should be embracing innovation and learn from the IT industry and even better the dotcom industry on how innovation is done quickly, efficiently and successfully…

Alternatives to paying millions in software licenses

January 9, 2012 2 comments

Telecom operators pay millions in software licenses each year. By doing so they are sustaining an industry of “feature loading”. “Feature loading” refers to complex software solutions that in order to win RFPs add more and more features. Most telecom operators are using RFPs to compare different software solutions. Whoever has more features for the lowest price wins the deal. The end result is that telecom software is unnecessary complex and expensive. Software providers do not want to respond with “not compliant” and prefer to add some extra feature even if the one who wrote the RFP will never ever use them.

The likes of Apple have shown us that software is most beautiful when it does very few things very well. The era of mini applications allows users to use special purpose “apps” for each activity. No training required. No heavy investment. No heavy integrations.

Telecom operators should move away from the long RFPs with hundreds of features being compared. Instead they should try to simplify. Why pay millions for a complex system that does too many things too complex? Many large dotcoms have moved away from this type of solutions and have used Open Source, have built single purpose systems/services or generic platforms with plugins to reduce complexity.

Examples:

  • Amazon has pioneered Cloud Computing and has created individual single purpose systems or services that are easily accessible via REST or Web Interfaces. Different individual services (e.g. product recommendation, virtual server, virtual storage) get aggregated into complex solutions at the last moment.
  • Google built its Google File System, BigTable, etc. as generic platforms on which hundreds of other services could be easily added.
  • Thousands of dotcoms are using Hadoop, Cassandra, etc. to store data.

Each telecom service needs to be provisioned, rated, charged, billed, monitored, operated, supported, migrated, etc. By building solutions in which network, IT, communication and services are mixed into mega-complex architectures it has become impossible to launch new services in less than 12 months.

Building a Free Telco PaaS

How to do it differently? Is it possible to build a zero-license Telco PaaS that acts like a giant service delivery platform in the Cloud? YES

Operators will need to use Open Source, IaaS and SaaS solutions. IaaS can be delivered cheaply by using Open Source components: KVM for virtualization, Open Nebula for virtual machine and storage management, Hadoop/Cassandra for storage, Open vSwitch for network virtualization, etc. On top PaaS platforms can be built with solutions like WSO2 Stratos. Telecom services like Twilio‘s or the private cloud version, RestComm, can be used to allow developers to quickly create VAS. Open Source billing systems have been announced, like Meveo. Online shops can be build with Opencart. Datawarehousing and data analytics with Pentaho or Jasper Reports. There are hundreds of open source monitoring solutions: Icinga, Nagios, Zenoss, etc. Helpdesk can either be SaaS like Zendesk, or Open Source like Request Tracker. CRM like SugarCRM. SIP backoffice systems like FreeSwitch.

Operators should start thinking about the Cloud as a way to simplify internal integrations. All back-office systems should be shielded from the outside via easy to use REST, Thrift/Protocol Buffers, etc. interfaces. Service-based loadbalancing should allow service upgrades and rolling migrations without outages. The architecture should be built with Salesforce.com in mind. Non-programmers, and even better end-users, can build their own VAS by using drag-and-drop interfaces and combining different service blocks together into custom solutions. Plug-ins allow for custom behaviour without cluttering a solution for the rest of the users.

Operators should embrace new disruptive technologies to simplify their business, lower their cost structures and be able to launch new services every hour of the day. Large dotcoms are launching new features every day and use A/B testing to validate if users like them and they add to the bottom line. Marketing and product management get a totally different dimension…

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