Rolling the triple-play dice

The Hothouse panelists agreed that while the challenges of triple-play are huge, the returns are uncertain. Not only is it unclear how much customers will be willing to pay for services, it is also unclear how much of this will go to the network operators and how much to Internet-based service providers

The spate of announcements about triple- and quad-play developments continues to accelerate as network operators search for ways to replace the revenues lost from their existing businesses. But delivering on services such as IPTV presents them with a huge challenge given the existing state of their access networks, and of the systems and processes that control them. This month's Telecom Hothouse looks at the financial and technical complexities facing the operator community. Neil McCartney, a regular contributor to the Financial Times and a respected media analyst, captures the discussion.

The Hothouse panelists agreed that the cost of meeting the triple- or quad-play challenge is bound to be enormous. Yet the returns remain uncertain. Not only is it unclear how much customers will be willing to pay for new services. It is also unclear how much of this money will go to the network operators and how much to Internet-based service providers such as Google or Skype - or to other companies which have yet to emerge.

Ian Pulford, director of product management for Evolved Networks, argued that the revenue pressure on operators from developments such as the growth of VoIP and the commoditization of broadband access was forcing them to go down this route. But a key problem was the poor state of the local loop due to years of underinvestment.

'They have to change the cost base of the access network,' he said, pointing out that this part of the business was responsible for about 40% of operating costs. 'Usually it was built over the last 10 to 20 years, and it might involve IBM equipment programmed in Cobol. After all most of the system was designed to automate the delivery of POTS.'

He added that while broadband now accounts for 25% of the market in Europe 'that's the easy bit' since research suggests that between 10% and 40% of customers will not be able to get ADSL2+ without significant investment by the operator. In any case, he said, next-generation services would require the rollout of higher-bandwidth networks which had capabilities beyond those of ADSL2+.

Research by Analysys suggests that the cost of rolling out fiber-to-the-premises (FTTP) would amount to about ‾,500 per home passed, and that the resulting network would generate only ‾ to ‾7 per user per month. While VDSL might cost less to deploy it could involve higher operating costs because of the need to retain copper in the distribution network.

Pulford noted that the problems related not only to the physical plant but also to the information held by the operators. Turning to research from the Yankee Group commissioned by his company, Pulford said it showed up to 50% of access network records are 'missing, inaccurate or incomplete.' The data, system and infrastructure all need to be improved or 'else you can't get the costs out of your system,' he concluded

 This view was echoed by Neil Kinder, technical director for Europe, the Middle-East, Africa and Latin-America for Sonus Networks, who agreed that the state of the network was a significant problem.

 

'Some European operators have more than 100 provisioning systems in their infrastructure,' he said. 'And they say that they don't know what some of these actually do until they turn them off.'

Jeremy Steventon-Barnes, director of strategic solutions for Tellabs, added that 'true' triple-play services would involve the provision of high-definition television - as Sky was already doing via satellite - and that this would require the provision of fiber to within 150 meters to 500 meters of the home. 'Otherwise it will just be basic television,' he said, 'and consumers want more than that.'

As noted by Simon Drinkwater, director of sales and business development for Entriq, such problems illustrate the difficulties faced in this sector by proponents of pay-media, which he described as 'a very simple proposition fighting to establish itself in a complex world.'

Geir Axel Oftedahl, director of business development at Packetfront, argued that given the time and money required to introduce a new network-centric service, the traditional operators were in danger of losing out to Internet-centric service providers such as Google, which had advantages such as larger scale and a better route to the customer, and did not need to develop killer applications in house.

But he added that the reluctance of network operators to move away from vertical integration was understandable so long as selling 'dumb pipes' was seen as the only alternative. Another option was to use the 'open access' approach in which the network owner offers access to a range of service providers competing on a level playing field. This approach is now being followed by a number of broadband operators in Europe and elsewhere - such as the Malarenergi City Network in Sweden, which uses Packetfront software. This is a publicly-funded network that uses a combination of FTTH, ADSL2+ and wireless and now offers a choice of 96 services from 23 service providers including IPTV from CanalDigital and ViaSat.

According to Oftedahl, this approach, which is also being used by the cities of Amsterdam, Vienna and Copenhagen, makes it possible to reduce deployment costs through scale effects. In the more densely-populated areas this could be less than $500 per home passed. He claimed that the Malarenergi network had been cash flow positive since the first year of operations. Even though most households have access to cable and DSL alternatives, and are required to pay for a substantial portion of the infrastructure equipment, the network is serving well over 50% of the households in its expanding footprint.

In the UK, said Kinder, a key issue would be the policy followed by BT's newly-created network access business, Openreach, which was set up at the start of this year. 'How will it respond now that it has been decoupled from the mother ship‾' he asked. 'How aggressive will it be‾'
But Pulford argued that Openreach's commitment to equivalent service to BT and to its rivals merely meant that it would be providing 'equal misery' for all service providers. 'The same system will be unable to deliver for BT as with others, unless there is a significant improvement in infrastructure. And getting fiber closer to the customer will take time.'

Kinder pointed out that while some operators were trying to address the problem by a making a major leap forward, such as BT's ‾ billion investment in ist 21st Century Network, others were taking the more cautious route of making themselves 'ready when other groups come to the market'.

 

'It's just too big an evolution for them to deal with quickly,' he argued, 'so they are slowing down the pace.'

Another problem for operators, said Pulford, was how to persuade those people who were already subscribing to cable television or satellite television service to migrate to an IPTV service.

Drinkwater noted that Sky's approach was to offer broadband for free using the Easynet network and to make money by offering layered content on top. He added that there were press reports that Rupert Murdoch was thinking of getting out of satellite and relying on IPTV instead.

One of the main cost items in rolling out new networks, added Kinder, was the individual equipment required for each customer - such as the CPE equipment required for DSL systems. 'That's the costly element, and that's the challenge,' he said.

Oftedahl agreed that a network operator needed to develop a business case that would allow it to be able to afford the rollout and pointed that it was far from certain that the operator would be the entity that would be supplying content over the network - rather than an Internet-based service provider or any other entity. 'The question the operator has to ask itself is, 'How am I going to ensure that whatever investment I make in the network actually pays off‾''

According to Kinder, similar considerations lay behind the stance taken by some mobile operators that are trying to prevent customers from using VoIP on their data services. 'They are policing data traffic to and from the handset because if voice starts going over data that can do severe damage to the business model,' he noted.

He added that while the cost of voice services were coming down, there was some question as to whether these would ever be entirely free. He said that for companies such as Carphone Warehouse the number one goal was to provide a service that was equivalent to BT's in terms of service. 'Some sectors will want cheap and cheerful services, such as students and techies,' he said. 'But the mass market will not.'

Steventon-Barnes agreed that it was important to match services to user expectation. He pointed out that the new generation of 'echo boomers' (the children of baby boomers) were people who had grown up with mobile and the Internet and were much more demanding consumers than their predecessors. 'They want services that are instant, intelligent and indispensable.'

Pulford noted that it remained unclear exactly how much customers will be prepared to pay for all of these services. 'We have indications about costs - they will be something between frightening and astronomic. We have far less idea about prices and revenues.'

He added that the picture looked worryingly like the early days of cable television. 'Advocates said that if you built cable past people's homes they would sign up. But they didn't. They had to add telephony to make it more attractive. Could history be repeating itself‾'

Steventon-Barnes responded that some operators in North America are already making money from these services and saying so publicly - such as Verizon and BellSouth/AT&T.

Access to content remained one of the biggest challenges for operators, argued Kinder, pointing out that 'the creators of the content are in the best place to determine how their media gets to the customer.'

 

Drinkwater agreed that operators faced the challenge of how to become media businesses, and that broadcasters faced a very different set of problems - such as how to cope with the decline of linear broadcasting. As the number of outlets proliferates, the problem for the consumer is how to begin to find the content he or she wants. 'This highlights one of the advantages of Google,' he said, 'they have profiles of the customers and they know what they are interested in.'

Oftedahl argued that operators are not in a strong position to become distributors of content. 'The bigger groups sit closer to the customer,' he said. 'Who will get a better deal out of Disney‾ Apple or BT‾ Clearly it will be Apple. So the operator is faced with the choice of either selling dumb pipes or selling integrated pipes that offer some value to Apple.'

Pulford said that Disney might choose instead to deal directly with the customer themselves, but Oftedahl responded that someone still had to provide the mechanism required to deliver the content.

Kinder noted that the issue of customer service was critical since the customer still had to be able to call someone if something went wrong. He pointed out that this was an area where the cable companies had suffered from their poor performance. 'When it doesn't go well, it can really sink the business,' he said. 'One of the key issues for Carphone Warehouse is to develop quality services that don't generate lots of red lights in the call center.'

The panel agreed that it was difficult to picture how the sector would look in five years.

Steventon-Barnes noted that different countries would see different patterns of development. In Eastern Europe, for instance, mobile broadband might leapfrog fixed broadband in the same way that mobile has overtaken fixed in the narrowband telephony sector.

Pulford argued that there will be a lot of mix and match solutions on offer. 'I would like to watch cricket on Sky but listen to the BBC radio commentary,' he said. 'I can do that now but there is a two-second delay between them.' 

The panel did agree that in the triple- and quad-play world of five year's time, increased consumer choice was a certainty. Managing the choices, and finding a route to an increased return on investment; was the real challenge for the operators.

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