Retail rings the changes for wholesale

The telecoms industry has so far proved itself a relatively bright spark during these dark and turbulent economic times. We see that infrastructure builds are continuing throughout the world as governments and international communications providers endeavour to unlock the economic potential of third-world and emerging economies; similarly technological advances and the introduction of new technologies to the market both continue unabated as the way in which we all choose to access and consume the electronic information and content at our disposal is constantly refined.

This economic beacon shows little sign of going out, if the industry’s analysts have got it right. Yankee Group, in a report titled It’s the Economy, Stupid: Yankee Group’s 2009 Predictions, says that “consumers will continue down the path of demanding ubiquitous access to their preferred content and services, but they will be more cognisant of the financial barriers to entry and are re-evaluating luxury versus necessity purchases”. And 2009 will be a year of significant change and evolution, according to Yankee Group, its expectation is that communications service usage will hold up, but that users will demand better value from their services. Similarly international market research institute EITO predicts that turnover of computers, software and IT services in western Europe will increase by 2% in 2009. IDC foresees that a slowdown in IT spending will have the effect of speeding up adoption of disruptive technologies and business models because “the benefits offered by these disruptive offerings and models will be magnified. Suppliers and customers will migrate toward new solutions not because they are about the future, but because they offer practical benefits today”.

At a retail consumer and an enterprise level, whatever the delivery method, there are root and branch changes underway in the way telecoms is used, all of which will have an impact on wholesale in the coming months. Wholesale carriers need to be alive to these changes in order to plan ahead and be fully prepared to gain maximum advantage from them.

Increased demand for mobile data services is one area that is having impact on internet usage. Although voice revenues may be on the wane, mobile operators are looking to fill the gap with an increased range of services, services which are enabled by mobile broadband and which mobile users seem more than ready and willing to consume. These businesses need to review their current infrastructure to maintain profitability in meeting customer’s escalating customer demands for new and improved mobile data services.

The industry has already witnessed rising non-messaging data revenues for retail-facing sections of the telecom sector, and Informa Telecoms & Media predicts that traffic growth will reach 77% by 2012. Vodafone’s non-messaging data revenues increased from £1.4 billion in 2007 to £2.2 billion in 2008, attributing this to the rising use of business email and PC connectivity devices. ABI Research estimates that backhaul costs stand at 30% of a mobile operator’s annual expenditure.

Consequently for wholesale carriers this is a serious issue. Lee Myall, director of media and content for Interoute comments that the “impact on the ISP/mobile operator that this demand for mobile data services has is a severely stretched network capacity, as well as potentially compromised quality of traditional voice and data services”, which means a big headache for wholesalers. Myall says the wholesale carrier is already seeing “peakier” internet usage as users find that they no longer need to be strapped to a PC. He gives an example from the UK in late 2008, when a media storm was created by the publication on the internet of the membership list of far-right political party the British National Party. The list, a 6Mb file, was “round the country in seconds”, something that would have been unthinkable only a few short years ago.

“From a carrier/wholesale perspective the challenge here will be the potential peaks or ‘peaky’ nature of data requirements driven by this activity,” he says. “Newly available ‘hot’ content could create a stampede and therefore place huge demands on bandwidth, whereas other times will be much quieter. ISP requirements will be for increasingly larger burst capability versus the commit.” Myall comments that the “impact on the ISP/mobile operator that this demand for mobile data services has is a severely stretched network capacity, as well as potentially compromised quality of traditional voice and data services”. This potential for compromised quality means a big headache for wholesale carriers.

This move to “peakier” traffic will be driven in part by the new wave of devices available to consumers which encourage access, as well as improved mobile data services. Facebook, for example, is available on a Blackberry. Sales of netbooks – these are the small, highly portable low-cost laptops with built-in modems with a much larger screen than a mobile handset – which encourage work on the move are really taking off. Research company Gartner is predicting sales of 5.2 million netbooks in 2008, reaching sales of 50 million in 2012. But every A-list PC maker is bringing out a netbook over the next few months and shipments may therefore increase – according to Gartner and Displaysearch, netbooks are already outselling iPhones, and 4.7 million iPhones were shipped in Q3 2008 compared to 5.6 million netbooks. With more options available to them for portable PCs, such as different form factors, performance and cost, consumers may happily use more than one PC.

Philomena Skeffington, a principal consultant with consultancy MMS, comments that netbooks could also increase PC ownership and the size of the broadband market. She says: “The provision of small PCs is significant as this will enhance consumption of video whilst outside the home as well as at home. A side effect of this business model is also likely to be an increased penetration of PCs in UK homes. Currently the average rate of PC penetration stands at 72% and it is this which constrains fixed broadband penetration, currently at 58%. At prices as low as £19 a month for the PC and the broadband access this puts PC ownership into the hands of many more, we could see PC penetration climb upwards on the back of this, significantly increasing the size of the broadband market.”

In addition the mobile operators are offering free USB modem sticks with their plans, in order to encourage mobile data use. And a user application bundled with the stick allows the user to roam between 3G and Wifi networks relatively seamlessly. Comments Skeffington: “Most mobile operators are offering mobile TV over their 3G networks. Plans are tending towards a flat fee with little usage dependent element.”

ISPs, as well as providing the more traditional broadband internet access and telephony products are now offering a range of TV services and other video download services.

On demand packages include pay per view TV with 24 hours to watch and can also include music on demand. Provision to niche audiences, such as sport, Asian, pre-school and adult channels which allows customers a little more customisation than standard TV packages has grown rapidly.

Surely uptake of these sorts of services will be hindered by recession, as consumers seek to tighten their belts and focus on essentials? Not so, according to commentators. “I can’t envisage a flattening in demand,” says Interoute’s Myall. “There may well be more of an inclination to stay at home, so people will continue to consume bandwidth for home entertainment purposes.”

A global internet traffic trends study from network traffic optimisation solutions supplier Sandvine in late 2008 found that real-time interactive communications is increasing up to 50% per subscriber during the peak evening hours, showing that families are spending more of their leisure time on the internet looking at Youtube, playing Xbox Live and talking over Skype. In the UK the BBC iPlayer appositely has demonstrated the demand for video on demand. More than 17 million BBC programmes were either downloaded or streamed to web browsers within the first six weeks of the iPlayer launch at Xmas 2007, currently programmes are free to watch for up to seven days after screening. The launch of the UK’s Project Kangaroo, a cross-broadcaster internet TV venture which will also allow users to purchase content from a large back catalogue, will help determine whether end users will be prepared to pay for greaterlevels of flexibility.

Video conferencing has had only a tentative hold in the enterprise market, but this hold is now getting stronger. The emergence of high-end video conferencing solutions like telepresence has given the technology a bit of a shot in the arm. Forrester reports that video conferencing in western Europe earned revenues of $252.5 million in 2007 and estimates this to reach $1,178.9 million in 2014.

As bandwidth and quality of service issues are overcome, video conferencing is finding its place as a replacement for travel, appealing to companies trying to lower their carbon footprint and reduce their travel budgets. Yankee Group predicts that video conferencing will come into its own in 2009 - and “companies in key enterprise verticals (particularly education, state and local government, and health care) will begin to build business processes around video”.

The move to cloud computing is predicted to speed up as users attempt to contain their costs IDC forecasts that while spending growth will slow for various cloud services, such as software-as-a-service (Saas) and cloud storage, it will outperform more traditional IT alternatives. According to Gartner, most organisations updated their software systems during the period 1997 through to 2001, so we are in the middle of an upgrade cycle that should extend past the end of this decade, and that many enterprises are replacing legacy software assets with the per-use services that come with SaaS/cloud computing, service-oriented architecture/Web 2.0 and open source software. Bear in mind, for example, that Google only weighed into cloud computing early in 2008 but the number of organisations using Google Apps had already passed the half million mark by the middle of the year, with 2,000 to 3,000 organisations signing up every day. And these are still early days – Microsoft only launched Windows Azure, its version of Windows that runs over the internet in October 2008.

Many of these organisations embracing cloud computing are SMEs, with larger enterprises put off by the potential for failure of putting their applications “into the cloud”. But the tide is turning as enterprises wake up to the cost benefits, scalability and performance that can be delivered by moving “into the cloud”.

Wholesale carriers have their work cut out for them. User-generated content clearly has a significant impact on retail business models and wholesale requirements. Ubiquitous internet access, on the move or at home via a variety of devices, increasing rich content available to download, a drive to better asset utilisation – for wholesale providers these trends have a huge impact. In broad terms they mean there will be a greater number of connections, which will generate more traffic, and that more video content to more users will need to be transported. Solutions will need to support nomadic and mobile users as well as fixed users in the home. It does means that the carrier will either be committing large amounts of bandwidth with low commits, which is expensive and hard to sustain, or contending bandwidth with the consequence of congestion during peak demand. Says Interoute’s Myall: “Put simply, capacity management and planning is going to get harder than ever before.” For its part Interoute is making sure it has as much information as possible so it can make decisions about network planning as far in advance as possible – it monitors its markets, using a range of data sources and asks for rolling commitments from its customers.

There will undoubtedly be both challenges and opportunities in the last miles as telcos seek to deliver all this data and debate the merits of fibre and ADSL2+. Quality of service issues also come to the fore, as operators seek to smooth out the peaks and spikes in demand. Caching and content distribution networks can solve some of the network congestion problems, but present additional challenges. Accurate market intelligence is everything: “What will also become increasingly important is greater knowledge of when and where demand might come from as this can help pre-empt demand before issues arise,” says Myall. “This will involve knowing who has what content available and who owns most of the potential audience for that content; this intelligence will give some idea of where peaky demand will fall.”

Hugh Roberts, senior strategist at business transformation consultancy Patni Telecoms Consulting, cautions that infrastructure owners need to fully address the issues of network platform and technology interoperability, because “in the future sticky multi-play services will require ‘seamless’ operation across multiple delivery channels and devices”.

Roberts makes some bold predictions. He says that it is now time for everyone along the telecoms value chain to think about how they can embrace wholesale as a way of life: “Changes to core business, business models and customer interaction management are inevitable, and the business transformation requirements are complex. Some network operators are preparing for this and are actively getting their houses in order, and some are not.”

Roberts points out that that nearly all of what has so far been introduced as multi-play services is little more than a single point of customer touch coupled with stapled and/or merged billing. This requirement stretches beyond the domain of the network and up into the BSS and enterprise systems: IMS (or similar), he says, will be unleveraged without a similar degree of interoperability at the customer management layer.

Roberts predicts that the current roll-outs of “asymmetric” networks which support disproportionately more bandwidth in one direction than the other, based on the expectation that broadcast/streaming services will dominate in the monetisation of data services, are likely to prove inappropriate. He says: “Whilst customers have been perceived of as the primary proponents of unthrottled services and a ‘free internet’, in reality all file sharing services now offer customers a ‘two-speed’ choice – free and thresholded with advertising, or high-speed unlimited premium subscriptions – and shareware licences are moving in the same direction.”

There are big opportunities for wholesalers who think about how they target their offerings: wholesalers should be able to find important sources of revenue from affinity groups and communities by selling appropriately packaged products directly to them. Says Roberts: “In large part this will be hastened by the continued arrogance and ‘controlling attitudes’ of the service providers and their continuing failure to understand customer dynamics. Portals utilising open internet platforms, for example World of Warcraft, together with hardware manufacturers like Apple and Nokia, and X-Factor new players like Google are rapidly eroding the power of the service providers to control the value chain, and wholesalers may be one of the main beneficiaries of this.”

A big question remains: who in the value chain will generate and manage what aspects of quality of service and service enablers and enhancements as a value-added service to the end customer? The likelihood is that the service providers will need to manage all aspects of data relating to customers, and the network will manage all aspects of the service relating to the service itself.

What is certain is that future wholesale will require far far greater levels of flexibility and interoperability than is the case at the moment. If wholesale carriers can achieve this flexibility then their opportunities for achieving more than high volume, low margin, bit-pipe revenues will be a reality.