the stupid network

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  1. 1. Telepocalypse Ltd.The Stupid Network: A User Guide Prepared for Cinderella Somewhere, SomecountryPrepared by:Martin Geddes, DirectorDocument version:0.1Date:10 December 2004
  2. 2. Abstract Carriers keep control of the wireless value web by controlling pinch points on the flow of value through handsets, networks and retail supply chains. This gives them power over their suppliers. They can also perform fine-grained price discrimination against users for the value that flows over the network. A move to open all-IP networks undermines this business model, and enables massive disintermediation of carrier toll systems. This paper describes the mechanics of this change, what the important value creators will be in an all-IP world, and suggests strategies and tactics for the varying market conditions along the way.Change History Date 7 Nov 04 22 Nov 04 3 Dec 04 10 Dec 04Who Martin Geddes Martin Geddes Martin Geddes Martin GeddesVersion 0.1 0.2 0.3 0.418 Dec 04Martin Geddes0.5Changes Document outline created. First draft. Cinderella v0.2 comments addressed. Added context diagram for the strategies; details on trust, billing, abuse; executive summary. 14 Dec conference call comments addressedContacts For Telepocalypse Ltd.: Martin Geddes, Director Telepocalypse Ltd, 26/5 Annandale St., Edinburgh, EH7 4AN, UK. Skype: mgeddes Yahoo: mgeddes_uk [email protected] Cinderella:About the Author Martin Geddes is thinker, writer, coder, inventor, agitator, irritant and consultant. He writes the popular telecom strategy weblog www.telepocalypse.net, cited by Business Week and Forbes among others. Before becoming an independent consultant he was a technology specialist and product strategy manager at Sprint in Kansas City, USA. During his time at Sprint he filed 17 patents on various mobile handset and edge service technologies. Martin also has extensive hands-on experience in the IT industry building large transactional systems at Oracle Corporation. He holds a bachelor's degree in Mathematics and Computation from Oxford University.Telepocalyptic Quote Who will be the biggest losers [from VOIP]? Not the fixed-line telcos, even though their revenues may fall by 25% by 2010 due to VOIP, according to Mr Mewawalla. The mobile operators are likely to be the big losers, with their revenues plunging by 80%. Together, VOIP and wireless broadband could fatally undermine their costly thirdgeneration (3G) networks. - The Economist, 2 December 2004
  3. 3. Executive summary Cinderella is finding it harder to maintain margins and volumes in the face of consolidating and powerful wireless network operators. At the same time, wireline operators are facing significant voice service revenue loss from VoIP, and are failing to create new billable events from other newer IP applications. Technology improvements such as Wi-Fi and FLASH-OFDM suggest similar dynamics will soon apply to wireless networks. The end goal for Cinderella is to create the greatest possible appeal to consumers buying devices for open all-IP networks, regardless of the interests of the network operator. In the transition, Cinderella needs to make the most attractive handsets for todays network operators to distribute.How network operators gain and lose control Network operators maintain command over the value web by controlling many individual value pinch points. These may be embedded in the handset, in the network, or external to both. Examples include the selection and positioning of menu entries, the home page URL, the ability to locate a handset and route inbound connections, and the establishment of carrier-specific retail outlets. The report provides a detailed breakdown of their nature, importance and future. These control points enable carriers to divide the profit pool in their favour compared to Cinderella, and engage in fine-grained price discrimination against users. In return, users expend considerable effort in bypassing these toll systems, and frequently meet with success. Avoidance of international voice toll fees, messaging charges and premium content costs are a way of life for many users. As the industry restructures from vertical integration to horizontal layers (separating data transport from service), the individual components that make up a communications service are exposed and potentially become separate businesses. The report uses SMS as an example of a dozen or so value elements hidden inside.Come on down, the price is wrong The prognosis for carrier control and ability to price discriminate is that such powers will steadily weaken over the rest of this decade. Other networked industries, primarily involving physical transport of goods and people, have experienced intensifying price discrimination over time. Yet the technical and economic structure of the Internet, as a transport for information goods, is fundamentally different. These precedents only serve to illuminate those differences.Keys to the operators power base Two critical elements are billing and digital identity. Even in a world where data transport is virtually free, there is likely to be an asymmetry in the end-user value of many communications resulting in a desire for creating a billable event. Digital identity traceable to real people, places and things provides vital glue to the system, preventing abuse. The carriers retain a critical advantage in these two areas.New ideas, not lower prices or arbitrage Other parts of the value network, however, are ripe for transfer outside of carrier control. By creating smart core networks that attempt to meter and add value to data 10 December 2004Page 3 of 52 Telepocalypse Ltd. 2004
  4. 4. flows, carriers have locked themselves in to often immediately obsolete technology. (There are cases where vertical integration of features into the network makes sense, and these are noted in the main text.) Their weakness is inability to deploy new services and change at the speed that the network edge demands. The purpose of IP networks is not low price or efficiency: it is absolute flexibility, with the network assuming the absolute minimum about the purpose and value of the connections made over it.Speak clearly after the tone This paints a potentially bright future for Cinderella, where constant innovation in applications drives an incessant demand for new handsets. A consequence is that much of the current approach to VoIP, which recreates the PSTNs approach on an IP infrastructure, is fundamentally flawed. IP enables completely new modes of communication, richer in sensuous forms of presence, group forming and collaboration. Voice remains at the heart of this, something frequently lost in the 3G content labyrinth. Wi-Fi networks are a key starting point, because they are the dominant form of fast, open wireless IP networks deployed today. However, Cinderella is compromising its position here by its preference for dual-mode handsets, which have to defer to the interests of incumbent cellular carriers. Cinderella is potentially conceding a key strategic market to non-traditional device competitors because it over-values mobility compared to price and new functionality.Playing your cards in the game of telecom To address the market changes Cinderella needs a multi-faceted approach that recognises that different markets enjoy varying levels of incumbent power and availability of IP networks to deliver value to users. The most important change Cinderella can make is to view its handsets as sales outlets for carrier services. Simple changes can make Cinderella handsets more appealing to the core metrics of carriers (ARPU, CPGA, CCPU, churn, free cash flow). The best possible sales message to a carrier is not a sexy new form factor, nor a juicy discount. Its evidence of better core financial performance, for example by On-screen reminders for pre-paid users to top up.Impulse buying of MMS messages with one-click send to the 2-3 most likely recipients (a-la Amazon one click).Highlighting on-net calls to reduce churn Calling Bob at Home (free on-net call!)Many more examples are given in the text. This is a pretty dramatic shift from the traditional hunt for new features for a consumer electronics company. Additional strategies include: focusing on features that have little or no network dependence; subversive features; creating more compelling applications; helping users dodge the carriers net; and leveraging existing market power. The main text includes a discussion of when these strategies are appropriate. To be successful, Cinderella needs to align everything it does to a move to stupid IP networks, from lobbying to venture financing, customer service to M&A. The report finishes off by recapping some of the landmark ideas that have shaped the communications revolution. In particular, all readers should become familiar with the Rise of the Stupid Network and its associated follow-ons.10 December 2004Page 4 of 52 Telepocalypse Ltd. 2004
  5. 5. Contents Executive summary ........................................................................................................................3 Disclaimer .......................................................................................................................................6 Introduction ....................................................................................................................................6 Part 1: Where we are ......................................................................................................................8 State of the Nation ....................................................................................................................8 Case study: Elvis has left the building ..........................................................................................9 How the carrier controls the value chain ...............................................................................9 T