Your television is ringing A survey of telecoms covergence l October 14th 2006

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Your television is ringing Also in this section

All things to all men Two other kinds of convergence. Page 3

The end of the line Traditional xed-line telephony has had its day. Page 5

Home and away After many false starts, xed and mobile phones are getting ready to merge. Page 7

Tuning in to the future? Telecoms rms are moving into television, but it may not be a licence to print money. Page 10

Changing the rules How should regulators respond to conver- Convergence is the telecoms industry’s new mantra. Whether gence? Page 12 customers really want it is another matter, says Tom Standage

HAT has come over the telecoms in- Meanwhile, large internet companies Winners and losers Wdustry? The spectacular crash of including Google, Yahoo! and Microsoft’s Who will benet most from convergence? 2001, with its associated bankruptcies, MSN marched into the telecoms business Page 14 fraud and the destruction of around $1 tril- by launching new services oering free lion of investors’ money, has evidently calls over the internet. Skype, the leader in been forgotten. The gloom has given way this market, was acquired by eBay for $2.6 to a fresh sense of opportunity and a re- billion. And equipment-makers began newed frenzy of dealmaking. The past teaming up too: Cisco, the world’s largest couple of years have seen a series of huge network-equipment rm, bought Scien- takeovers and mergers among network tic-Atlanta, which makes television set- operators and makers of telecoms equip- top boxes, for $6.9 billion; Alcatel and Lu- ment around the world. cent agreed to merge in an $11 billion deal; In America SBC paid $16 billion for and Nokia and Siemens combined their AT&T, took its name, and then swallowed network-equipment divisions. BellSouth for a further $67 billion. Its rival At rst sight these deals might not ap- Verizon, meanwhile, bought MCI for $8.4 pear to have much to do with each other. billion. In Europe Telefónica, Spain’s na- But all of these transactions were

tional incumbent operator, bought O2, a prompted by a single underlying trend wireless rm with networks in several that has become the industry’s new man- European countries, for £17.7 billion ($31.3 tra: convergence. billion). NTL, Britain’s cable operator, bought Virgin Mobile, a mobile operator, All together now for £962m. Vodafone, the world’s biggest What this means, roughly, is the coming mobile operator by revenue, signalled a re- together of previously separate communi- treat from its global ambitions and sold its cations and entertainment services: xed Japanese arm to Softbank, a local wireline and mobile telephony, broadband in- broadband operator, for $15.4 billion. ternet access and television. But more of- In addition to these and many other ten the word is used in a quasi-mystical A list of sources can be found online deals, operators around the world began way to evoke information heaven. Con- www.economist.com/surveys building next-generation networks at vergence really means the freedom for vast expense. Verizon is spending over $18 consumers to use any service under any An audio interview with the author is at billion on its new network, and Britain’s circumstances they choose to, says Ben www.economist.com/audio BT is spending £10 billion. These networks Verwaayen, the boss of BT. It is a question allow telecoms operators to oer televi- of convenience, enriching people’s lives, Past articles on telecommunications are at sion service in addition to voice calls and because we can provide communications, www.economist.com/telecoms broadband internet access. information and entertainment the way1 2 A survey of telecoms convergence The Economist October 14th 2006

2 they want it, says Mark Wegleitner, chief Robert Lloyd of Cisco. A converged, all-IP multichannel television. This explains technologist at Verizon. We want to bring network of this kind has two immediate many of the deals that have taken place in simplicity to our customers, the rst step technical advantages for network oper- recent months. AT&T, which is already towards digital paradise! exclaims Didier ators, he says. The rst is that it costs less to rolling out a fast new network to carry TV Lombard, the chairman of France Telecom. run, thanks to its far simpler architecture signals, bought BellSouth in order to win In fact, although the industry likes to and the economies of scale associated full control of Cingular, its wireless joint depict convergence as a great boon for cus- with internet standards. BT, a rm widely venture, and complete the quadruple-play tomers, it actually involves a technological regarded as a pioneer in the switch to next- package. Softbank, which already oers shift that, in the rst instance at least, will generation networks, expects its operating television, voice calling and internet ac- primarily benet network operators. At its expenses to fall by 30% once its new 21st cess over xed broadband links under the heart, convergence is the result of the tele- Century Network (21CN) is completed in Yahoo! BB brand, bought Vodafone Japan coms industry’s embrace of internet tech- 2009. By 2010 you will have to look very to add mobile to the mix. Similarly, NTL nology, which provides a cheaper, more hard to nd a xed or mobile operator that bought Virgin Mobile, and America’s big ecient way to move data around on net- is not running its trac over an IP core, cable operators last year struck a deal with works. On the internet everything travels says Mr Lloyd. Sprint Nextel, a wireless operator. in the form of packets of data, encoded The second advantage is that in theory, The desire to oer a one-stop shop for using internet protocol, or IP. The same new services can be added far more quadruple-play services has also system can also be used to encode phone quickly and easily, without the need to prompted several national incumbent op- conversations, text and photo messages, add any new network infrastructure. Add- erators to reabsorb their previously sepa- video calls and television channelsand ing a new service amounts to little more rate wireless operations. And it has hast- indeed anything else. than adding software to the core of the net- ened consolidation among telecoms- It is only relatively recently that IP tech- work and perhaps some new access tech- equipment vendors, such as the Alcatel- nology has matured to the point that it can nologies around the edges. Lucent and Nokia-Siemens deals. Large carry these other services reliably and e- operators have concluded that buying as ciently, says Basil Alwan, the president of The rise of the quadruple play much as possible from a single equipment- IP activities at Alcatel. But now that it has Because of the convergence on IP net- maker increases their bargaining power happened, operators can replace a jumble works, companies that used to be in sepa- and avoids problems with integrating of dierent networks for services such as rate industriestelephone operators, in- equipment from dierent suppliers. voice, data and videoeach with its own ternet-service providers and cable-TV Operators claim that selling all four ser- order-entry, billing and fault-reporting rmssuddenly nd themselves in the vices together as a bundle makes life easier systemswith a single network on which same business. Cable companies now of- and more convenient for customers. Cus- everything travels as interleaved streams fer broadband internet and voice services tomers in our experience really want that, of IP packets. The ultimate goal is to have over networks that used to carry just tele- says Ed Whitacre, the swashbuckling one IP infrastructure, and services running vision, and telecoms rms have upgraded Texan boss of AT&T and one of the most on that infrastructure, says Mr Alwan. their networks to carry television signals. vocal proponents of the merits of bun- This convergence aects not only wire- In the new converged world any rm that dling, and we can give them a better line networks, but wireless ones too. To- can deliver an IP stream to customers over price. The average American household day, operators run separate but intercon- its network can oer any or all of these ser- spends $176 a month on telephone, broad- nected networks for xed and mobile vices. And oering several of them to- band and television services, according to phones. But the new converged networks gether, many operators believe, is a win- gures from Parks Associates, a consul- are access agnostic. In short, a single core ning strategy. tancy. Mr Whitacre’s stated aim is to re- network may have a variety of devices Hence the current scramble to oer the duce costs by building a converged net- connected to its edges via dierent tech- quadruple playthe name given to the work, and to oer the quadruple play for nologies. Traditional xed-line phones combination of xed and mobile tele- as little as $100 a month. might be connected via wires; mobile phony, broadband internet access and There is indeed evidence that custom- phones via base-stations; and televisions ers like the discounts associated with bun- or computers via broadband telephone dles and the convenience of a single bill. lines or Wi-Fi links. Triple vision 1 Customers are much more open to pur- Access agnosticism should enable a Triple-play subscriber forecast, m chasing via the bundle, says Mikal Harn, mobile phone, say, to connect to the core vice-president of consumer marketing at Asia-Pacific Western Europe AT&T network via Wi-Fi in the home and then North America Other . For the incumbent telecoms oper- switch seamlessly to a traditional cellular 35 ators, however, the quadruple play is all connection outdoors. The core network re- 30 about protecting their core business of mains untouched as new access technol- xed-line voice calls, which still accounts 25 ogies (such as bre-optic links or new for the bulk of their revenues. 20 kinds of high-speed wireless data technol- Their problem is that xed-line sub- ogy) are added to its edges. In an industry 15 scribers are being lured away by cable op- that loves obscure acronyms, the frame- 10 erators and voice-over-internet rms, or work for linking everything up in this way 5 are getting rid of their xed lines in favour is known as IMS, TISPAN or NGN. 0 of mobile phones. During 2005, for exam- 2005 06 07 08 09 10 IP in a converged world enables one ple, the number of xed telephone lines network, many services, any access, says Source: Pyramid Research operated by Verizon, America’s second-1 The Economist October 14th 2006 A survey of telecoms convergence 3

2 largest telecoms rm, declined by 8%. Its costs, because all the services can be ad- the telecoms industry may be experienc- losses were greatest in the New York met- vertised together under a single brand. ing a sense of déjà vu. This is the same in- ropolitan area, where it faces the most That is why France Telecom recently re- dustry that spent tens of billions of dollars competition from cable operators oering branded its Wanadoo broadband division building new bre-optic networks in the voice services, says Stephan Beckert of and Equant corporate-networks division late 1990s, in anticipation of a surge in traf- TeleGeography, a market-research rm. to align them with Orange, its far stronger c that never materialised. The result was As cable operators oer customers the mobile-phone brand. This will allow the a spectacular crash. triple play of voice, broadband and tele- company to sell bundles of services to Meanwhile, European operators paid vision, telecoms operators have concluded both consumers and businesses under a around 100 billion for licences to build that their best defence is to respond in kind single brand. It cost a lot to support all new high-speed third-generation (3G) and also to throw in wireless, which many those brands, so it’s very rational to choose mobile networks. They hoped that as reve- cable operators are not yet able to oer. the most popular brand in the collection to nue from voice calls levelled o, the new Customers who sign up for a bundle of support all our products, says Mr Lom- networks would open up a lucrative new services and its associated discount can- bard. Similarly, doing away with the old data-services market. But take-up of data not defect to a rival provider of any one of SBC, BellSouth and Cingular brands in fa- services fell far short of expectations, and the services without losing the discount. vour of the much stronger AT&T brand is 3G’s real value proved to be much less ex- We make the product more stickycus- a huge opportunity for us, says Mr Harn. citing: an ability to cut operating costs and tomers don’t seem to leave, says Mr Whi- provide lots of cheap voice capacity. This tacre. Similarly, cable operators are using Shades of 3G? caused huge write-downs in the value of bundles to protect their core business, Convergence and bundling, in short, are the licences. Both of these episodes are which is not voice but television, as it, too, two sides of the same coin. The conver- now regarded as embarrassing collective comes under attack from satellite-TV pro- gence of multiple networks makes bun- hallucinations over which the industry viders and now telecoms operators. dles of services cheaper to provide; and prefers to draw a veil. But might the same Another benet of bundling every- the business logic of bundling makes the thing happen again with convergence? thing together is that it reduces advertising, cost of building new, converged networks What problem is convergence solv- customer-acquisition and other marketing easier to justify. But anyone familiar with ing? asks Andrew Odlyzko, an expert in1

All things to all men Two other kinds of convergence

ART of the attraction of convergence is more reliant on software and complex vergence on a single powerful device that Pthat it covers so many dierent things. computer systems to handle service de- can perform all of these functions. If you ask ve people what it means, livery; computing, meanwhile, is begin- But although the various kinds of digi- you’ll get seven dierent viewpoints, ning to look more and more like telecoms tal device look increasingly similar on the says Stephen Bye, who is in charge of as software is increasingly delivered as a inside, they look increasingly dierent on wireless and converged services at network service and companies are the outside. Just look at the huge range of AT&T. In addition to the broad trend of increasingly dependent on their net- mobile devices, from basic handsets that convergence between voice, data and works to keep things running. Hence the simply deliver voice calls to BlackBerry- entertainment services, and the networks advance of the big systems integrators type e-mail terminals and multimedia and companies that deliver them, the into telecoms services, and the move of handsets that let you watch TV on the term is also used in at least two other telecoms rms into IT services. This trend move. We have to be extremely careful senses that are worth a brief glance. is real enough, but it is not central to most that we don’t go in the Swiss army knife The rst is the convergence between telecoms operators’ strategies. kind of direction where we lose focus on the worlds of telecoms and computing, what the consumer wants, says Olli- otherwise known as information tech- A remote control for your life Pekka Kallasvuo, the boss of Nokia, the nology (IT). These have long been two The second is device convergence. world’s biggest handset-maker. industries separated by a common love Everything from a laptop to a mobile Jack-of-all-trades handsets have gener- of technology. For many years there was phone to a television to a games console ally not sold very well. So Nokia’s range networking the telecoms way (generally is now, arguably, the same kind of device: of converged devices, the Nseries, con- expensive, proprietary and reliable) and each consists of a microprocessor, a sists of a variety of devices with specic the computer way (generally cheap, stan- screen, some storage, an input device and strengths: as a music-player, a mobile TV dards-based and sometimes aky). But a network connection. You can make or a camcorder, in addition to being a now the two worlds are starting to look phone calls on your laptop, play games phone. The trend is not towards a single more similar as internet standards and on your mobile phone and watch videos converged device, but towards a greater technologies spread. on your games console. This has diversity of hybrid devices. Not so much Telecoms networks are becoming ever prompted much speculation about con- convergence, then, as divergence. 4 A survey of telecoms convergence The Economist October 14th 2006

2 the economic history of telecoms at the ligence Unit, a sister company of this University of Minnesota. It is solving Best bets 2 newspaper, 80% of telecoms executives complexity issues for service providers, Impact of types of convergence within next three years surveyed agreed that it was essential to but it is not actually solving much for con- % of telecoms executives saying very strong or strong embrace convergence within the next sumers. Guy Zibi, an analyst at Pyramid three years as a source of long-term reve- 0 20406080100 Research, a telecoms consultancy, is nue growth. The same survey also asked equally sceptical: It’s the technology de- Voice and data respondents which converged services partment driving the marketing depart- Fixed and mobile and markets they thought were likely to ment. As with 3G, he says, operators are Telecoms and media prove most important (see chart 2). The rushing to provide new services even Telecoms and IT clear leader was voice-data convergence, though consumer demand is unclear and Device followed by xed-mobile convergence the technology is still immature. and telecoms-media convergence. And Sources: Economist Intelligence Unit; IBM Even some people in the industry, such these are, indeed, the three areas where as Arun Sarin, the chief executive of Voda- convergence is most visible. fone, have their doubts. As a wireless-only corders remotely, either via the web or This survey will examine the prospects operator, Vodafone could nd itself high from a mobile phone. for convergence by looking at each of these and dry if convergence does indeed prove Mr Verwaayen, a passionate football areas in turn. Of the three, voice-data con- to be the next big thing. But so far Mr Sarin fan, talks enthusiastically about the idea of vergence is clearly the most mature (think has taken a cautious view of convergence, combining television with audioconfe- of the popularity of Skype, an internet- prompting much criticism of his strategy. rencing, so that a group of friends can calling service that is now practically a Despite some recent convergence-friendly watch a match together from dierent lo- household name) and provides the stron- tweaks to its business model, including cations. Many operators are experiment- gest evidence of the power of convergence moves into the xed-line broadband mar- ing with security cameras that sit in your to reshape the industry. Fixed-mobile con- ket in Britain, Germany and Italy, Voda- home, or perhaps your holiday home, and vergence is less advanced, though the rst fone’s main focus is still on mobile. It’s allow you to keep an eye on the place from commercial services are now available in very early days, says Mr Sarin. We are your mobile phone or over the web. And some countries. Telecoms operators’ move dubious that customers really want all the there is the prospect of integrating your into the television market is also at an early things that people are imagining that they telephone with your television, so that stage, though there have already been want. In particular, it is wrong to assume when you are watching a lm and some- some notable successes. that everyone wants quadruple play, he one calls you, the caller’s name appears on Whether or not convergence turns out thinks: We’re not saying that there are no the screen and the lm pauses automati- to merit the hype, the industry has con- customers who demand thiswe’re say- cally if you pick up the phone. vinced itself that it is worth pursuing, and ing it’s a very small fraction of customers. Convergence, then, promises operators anyone who disagrees risks being left be- So far, the evidence seems to prove him both the means to defend themselves hind. As soon as one operator adopts con- right. Only 1% of consumers in Italy, 8% in against competitors today and the pros- vergence, all the others have to follow, France and 10% in Britain have signed up pect of new revenues tomorrow. Accord- says Mr Lombard. Quite how far and how for triple-play bundles of xed-line voice, ing to a survey published last year by IBM, fast the process will go remains to be seen. broadband internet and television, accord- a computer giant, and the Economist Intel- But like it or not, convergence is coming. 7 ing to gures from Forrester, a consultancy. In a survey it carried out, 44% of European consumers said they were not interested in such service bundles, though 49% said they might be interested if there was a dis- count. But if operators have to oer steep discounts to get people to sign up for their bundles, it will be harder for them to jus- tify the expense of building new con- verged networks.

Ready or not, here it comes True believers in convergence insist that it is about more than simply bundling exist- ing services together: it will make new ser- vices possible, too. Many operators are al- ready getting excited about xed-mobile convergence, in which a single handset can be used both as a mobile phone out- doors and to make cheap calls via a xed line at home or in the oce. Another oft- cited example of a new service made pos- sible by convergence is to enable custom- ers to programme their digital-video re- The Economist October 14th 2006 A survey of telecoms convergence 5

The end of the line

Traditional xed-line telephony has had its day

T WAS the industry’s bread and butter tion and competition as new entrants Ifor over a century. But the end is now in ood into the market. The spectacular fail- sight for traditional telephone service, ure of Vonage’s initial public oeringthe which will soon be overtaken by voice- rm’s share price collapsed after it oated over-internet calls in terms of usage, and on the NASDAQ exchange in Maydid not displaced by broadband internet access as signal a lack of condence in VoIP; it the core revenue-earning service oered merely demonstrated that Vonage now over xed lines by telecoms rms. And faces serious competition in a market it even if the traditional telephone is not helped to pioneer. According to Infonetics, quite dead yet, its business model cer- a market-research rm, VoIP-based tele- tainly is: metered telephone calls whose phone services worldwide had 24m resi- cost depends on the length of the call and dential subscribers last year; by 2009 the the distance covered are becoming an number is forecast to reach 131m. anachronism. The demise of traditional telephony Let computer speak unto computer can be charted in two ways: by looking at Those gures exclude computer-to-com- the proportion of call trac carried using puter VoIP calling, which is also growing voice-over-internet-protocol (VoIP) tech- fast. The success of Skype has prompted nology, which already exceeds 50% on big internet rms, including Google, Ya- some routes and seems to be heading to- hoo!, Microsoft and AOL, to launch similar wards 100%; and by looking at the cost per eventually cost nothing. You don’t pay for services, which allow free calls between minute of calls, which appears to be head- each e-mail or each web page you load, he computers and very cheap or free calls be- ing inexorably downwards, thanks to says. It’s the same with phone calls. That’s tween computers and traditional tele- VoIP’s far lower costs and higher e- where it’s going. It will be free. phones. That is why Skype sold itself to ciency. VoIP is cheaper because instead of Aside from undermining the pricing eBay for $2.6 billion last year, Mr Zenn- establishing a dedicated circuit to connect model of a trillion-dollar industry that still ström explains. We thought it would be two callers, it encodes the telephone call as makes most of its money from voice calls, good for us, as we get into competition a two-way stream of data packets that are VoIP is disruptive in other ways, too. VoIP with big internet companies, to be part of a sent over a high-speed internet connec- phones can have traditional phone num- big internet company ourselves. tion. This encoding can be done either by a bers associated with them. But they work Businesses are also embracing VoIP, computer running a piece of software such wherever they are, provided they are which allows them to use a single network as Skype, the most popular VoIP provider, plugged into the internet, making a mock- to carry both voice and data within and which now has more than 100m users; or ery of geographical conventions such as between oces. To start with, the attrac- it can be done by a small box, called an an- area codes. So you can assign, say, a San tion of VoIP was simply cost reduction, alogue terminal adapter, which allows a Francisco phone number (area code 415) to says Cisco’s Mr Lloyd. His company, standard telephone to be plugged into a your phone, take it to another country, which competes neck-and-neck with Nor- broadband connection. plug it into a broadband connection and tel to be the leading supplier of VoIP tele- have people in San Francisco call you for phony equipment, has sold over 9m desk- VoIPocalypse now the price of a local call. top VoIP phones. New buildings and Sending packets across the internet is free More subtly, VoIP decouples the two oces now routinely have a single net- once you have paid for your broadband previously intertwined components of te- work installed, rather than separate phone subscription, so calls that travel entirely on lephony: access to the network (via a wire and data networks, he explains. Sales of the internet, such as those between two running into your house, for example) and traditional switchboard equipment are in Skype users, cost nothing. If you use a service (the ability to make and receive decline, whereas sales of IP-enabled VoIP service to connect you to a traditional calls). Traditionally, access and service equipment are growing at a rate of about telephone, the call travels mostly across have been provided together. But with 30% a year. Already, more than one-third the internet but pops out onto the local VoIP you can buy broadband access from of large North American companies have phone network at the other end; the one rm (a cable operator, say) and a tele- adopted VoIP, and two-thirds will have owner of that network then charges a fee phony service from another (such as Von- done so by 2010, according to Infonetics. to deliver, or terminate, the call, typically age). So owning the access network no lon- Having started out as a means of reduc- no more than a local call. All this reduces ger confers a monopoly on voice service; ing costs, VoIP phones are now being the price of telephone calls dramatically. conversely, it is possible to oer a voice ser- adopted because of the new features they Indeed, Niklas Zennström, the co-founder vice without owning an access network. oer, says Mr Lloyd. With a VoIP-based of Skype, believes that voice calls will The result has been a surge of innova- phone system, oce workers can sit down1 6 A survey of telecoms convergence The Economist October 14th 2006

2 at any desk and log into the phone, which coms industry, says Mr Odlyzko of the lecom in France, for example, includes un- instantly becomes their extension. They University of Minnesota. Voice is still limited national calls to xed-line phones, can also use VoIP phones at home or in ho- what matters the most, it is still 70-80% of as well as a selection of free television tel rooms, making and receiving calls just revenues for the industry worldwide, and channels, with its broadband service. Con- as though they were sitting at their desks. it’s going to zero in price. So how do you versely, some rms oer free broadband to It completely decouples us from loca- handle that transition? Forrester, a con- telephone subscribers. Of course, nothing tionmy oce is wherever I happen to sultancy, reports that voice revenue is now is really free, insists BT’s Mr Verwaayen. be, says Peter Carbone of Nortel, via his falling by 10% a year at France Telecom, 6% Where voice, data and video are inter- VoIP phone. VoIP also allows call-centre at Deutsche Telekom and 5% at BT. The changeable, it’s very dicult to allocate operators to work from home, making it same sort of thing is happening in Amer- cost to one service or another, he says. easier to match the number of workers to ica, Japan and other developed countries. The word ‘free’ can only be used once, uctuating demand. Incumbent telecoms rms around the and you can randomly choose the compo- world have responded to VoIP in a num- nent you make free. If you can’t beat ’em, join ’em ber of ways. Some Middle Eastern coun- Mr Wegleitner at Verizon thinks the All of this is a decidedly mixed blessing for tries have banned VoIP and blocked access threat from rms like Skype and Vonage is telecoms operators. On the one hand they to Skype’s website, in order to protect their overstated, because they cannot oer the have been able to reduce their own costs incumbent telecoms rms and ensure that same range of services as a network oper- by adopting VoIP internally to carry calls phones can continue to be tapped (which ator. I question the long-term viability of around their networks. Telecom Italia, for is very dicult to do with VoIP). But in the those solutions, he says. Can a VoIP sup- example, began using VoIP for all phone developed world regulators take a dim plier really compete with a full-service pro- calls between Rome and Milan in 2002, re- view of such practices, so operators have vider like a telco or a cable company? On ducing costs by 60%, says Stefano Pileri, had to respond in other ways. To start with this view, the real threat to incumbents the company’s chief technologist. Once BT they switched to new pricing structures, comes more from cable operators oering completes its 21st Century Network in reducing their call charges and raising their cheap (or free) VoIP services than from 2009, all calls will travel across the net- monthly line-rental charges instead. Many pure-play VoIP companies. work as VoIP calls, though customers will operators have now done away with call But Mr Zennström insists his company still be able to use their old telephones. Be- charges altogether and instead oer unlim- will stay ahead of the game. This has now ing able to handle voice calls cheaply, as ited local, national and even some interna- moved on to enhancing communications just another stream of data, is one of the tional calls for a at monthly fee. in new ways, he says, by integrating voice benets of building a converged network. Incumbent operators also reluctantly calls with videoconferencing, instant mes- On the other hand most operators still began launching low-cost VoIP services of saging, presence services that show derive most of their revenues from voice their own, because their customers were whether someone is available, le trans- calls, so the inexorable decline in voice rev- defecting to VoIP providers, and a VoIP fers and other social-networking and enue as consumers and companies adopt customer is better than no customer at all. collaboration tools. Beyond the zero price VoIP strikes right at the heart of their busi- Obviously, even if it disturbs the business point you need to start oering better ser- ness. According to gures from Informa, a model of traditional voice, you cannot vices, unleashing and enhancing tele- market-research rm, global revenues stop itit’s ridiculous to ght against pro- phony using IP networks, he says. from xed-line voice calls were around gress, says France Telecom’s Mr Lombard. $600 billion in 2005, and data revenues Instead, he says, incumbents must now try Trouble in the air were $202 billion. By 2010, it predicts, to capture as much as possible of the new Even if their voice revenues vanish alto- xed-line calls will account for less than VoIP market. For example, France Telecom gether, xed-line operators do at least have half of operators’ revenues in the de- has dierentiated itself from VoIP compet- a booming new business in the form of veloped world. Instead, their new core itors by using the technology as the basis broadband internet access, global reve- product will be broadband internet access. of its new Voix Haute Dénition (high- nues from which will grow from $202 bil- This is the key dilemma for the tele- denition voice) service, which enables lion in 2005 to $410 billion by 2011, In- hi- quality audio connections between forma predicts. That will help to make up subscribers. Other operators, including BT, for the decline of voice, and some oper- A business to get out of 3 have launched similar products. Oper- ators believe that new broadband services Net retained revenue per minute ators around the world, including AT&T such as television will actually enable International calls, US carriers, $ and Verizon in America, also oer VoIP them to increase their overall revenues. 2.0 services which customers can use over Mobile operators, however, are in a very any broadband connection. dierent position. They rely even more 1.5 Bundling provides incumbent oper- heavily than xed-line operators on reve- ators with another defence against VoIP. nue from voice calls, and despite years of 1.0 They might choose to oer subscribers a eort and the construction of new high- triple-play bundle in which voice is speed third-generation (3G) networks, freeie, the subscriber pays only for the they have been unable to convince their 0.5 broadband and television services at the subscribers to embrace data services. usual rates. Some cable companies and al- This makes them extremely vulnerable 0 ternative operators (which run xed-line to the spread of VoIP to mobile phones. 1964 70 75 80 85 90 95 2003 phone networks in competition with in- Convergence of networks implies conver- Source: FCC cumbents) are already doing this: Free Te- gence of prices, argues Cyrus Mewawalla,1 The Economist October 14th 2006 A survey of telecoms convergence 7

2 an analyst at Westhall Capital, and mobile able business customers from rival oper- prices are typically three to ten times The less the better 4 ators. But its model may point the way for higher than xed-line prices. The majority % of revenues derived from voice services other mobile operators. of mobile operators depend on voice for February 2006 Just as xed-line operators have over 80% of their revenues, and voice switched to at-rate billing plans, mobile 0 20406080 prices are likely to fall close to zero in an operators could oer unlimited national internet-centric world, he says. He notes Vodafone voice calls plus unlimited data for a xed that each new telecoms technology Sprint Nextel fee, so there would be less incentive to use spreads more quickly than the last: xed- Telecom Italia VoIP instead. Some operators are already line telephones took 50 years to reach 50% moving that way, and unlimited-use data Verizon of the population, mobile phones took 20 plans are also growing in popularity. Vo- years, the internet ten and broadband ve AT&T dafone’s Mr Sarin says he is watching the in some parts of the world. Mobile VoIP NTT technology closely. But it need not be bad could be widespread within two or three Deutsche Telekom news for his company, he insists, because years, he thinks. to make mobile VoIP calls subscribers will KPN The emergence of a Skype-like piece of still need to pay for access to a high-speed software that could be downloaded onto a NTT DoCoMo wireless network, which is exactly what 3G phone and used to make VoIP calls France Telecom mobile operators provide. could be lethal to mobile operators, says PCCW Indeed, operators might embrace mo- V IP John Barrett of Parks Associates, a consul- BT bile o technology themselves, as the tancy. Operators oer data communica- cheapest way to oer unlimited calls. A re- tions far more cheaply than voice, often in Source: Westhall Capital cent report by Analysys, a consultancy, the form of at-rate data packages, so sub- predicts that mobile VoIP will account for scribers could avoid call charges and the threat of mobile VoIP looms ever 25% of mobile calls in Europe and America roaming charges by using a VoIP program larger. Ironically, as mobile operators race by 2015but that this will actually be a to disguise their mobile calls as data trac. to upgrade their 3G networks to oer good thing for operators. They will oer Operators could block access or degrade wider coverage and higher transmission mobile VoIP as a premium service with the quality of their data services, but that speeds, they also increase their vulnerabil- additional features such as instant messag- would antagonise subscribers. Cutting ity to VoIP. ing and presence information. At the voice prices to make traditional mobile So what can mobile operators do? same time mobile VoIP will reduce costs calling more attractive would decimate Some of them are already experimenting for operators, just as it has done for xed- their revenues, and raising data prices to with mobile VoIP, says Mr Zennström, as a line operators, the report predicts. discourage VoIP calling would erect more means of dierentiating themselves from Voice-data convergence, then, seems barriers to the take-up of their new data their competitors. In particular, E-Plus, a likely to mean that in future customers will services upon which the operators are re- German mobile operator, has a partner- pay a monthly access fee to use their lying for future growth. They are between ship with Skype that allows subscribers to phones but not pay for individual calls. a rock and a hard place, says Mr Barrett. its unlimited 3G data plan to use Skype on Geographical and time-based charging For the time being, he says, getting VoIP the move for a fee of 40 ($51) a month will pass into history as VoIP erases the to work on a mobile handset would be too though they still have to use a laptop com- distinction between voice and data. This ddly for most people. But as handsets puter with a wireless-data card rather than will happen on both xed and mobile start to resemble pocket computers, with a mobile phone. E-Plus is doing this mainly phonesthough convergence is starting to downloadable games and other software, to sell wireless-data cards and win valu- erase that distinction, too. 7 Home and away

After many false starts, xed and mobile phones are getting ready to merge

ITY the poor old xed-line telephone. from xed to mobile networks. Some peo- long dreamed of combining xed and mo- PNot only is it now being hollowed out ple are even cutting the cordditching bile phones to provide the best of both by VoIP technology; it has also been up- xed lines altogether in favour of mobile worlds: the freedom and exibility of a staged in recent years by the mobile phones. The proportion of mobile-only mobile phone plus the reliability and low phone, a far more glamorous, capable and households is approaching 10% in Amer- cost of xed lines. This is called xed-mo- personal device. The xed-line phone ica, around 15% in western Europe and bile convergence (FMC), and there have looks old-fashioned by comparison. over 35% in Finland. been many failed attempts at it over the Where is the colour screen, the camera, the But xed-line phones do have some years. But this time it looks as though it funky ringtone? What, no text messaging? things going for them. Calls are cheaper might really happen, thanks to improve- No wonder mobiles now outnumber xed and clearer, and you do not have to hunt ments in technology and the industry’s phones, and that voice trac is migrating around for a signal. So technologists have current mania for convergence. FMC may1 8 A survey of telecoms convergence The Economist October 14th 2006

2 nally be taking o after so many false starts and empty promises, says Mike Thelander of Signals Research Group, a consultancy. The prospects for xed-mobile conver- gence have improved because of the spread in recent years of broadband in- ternet connections and the Wi-Fi short- range wireless networking standard, two crucial elements for FMC. Calls are han- dled within the home by a small base-sta- tion that plugs into a xed-line broadband internet connection. This base-station communicates with nearby mobile phones using Wi-Fi (so you will need a new dual mode Wi-Fi-capable handset, to the delight of handset rms). The home base-station pretends, in ef- fect, to be an ordinary mobile-phone base- station. As you enter your house, your phone roams on to it. When you make a also provides a defence against pure-play Fusion’s defence. The technology works call, it is routed as a VoIP call over the VoIP operators, who can compete with in- well, he says, and by mid-2006 some broadband connection, which can handle cumbent xed-line operators on cost but 35,000 subscribers had signed up, which several calls at once. If you leave the house cannot provide the seamless service of a I think is fantastic (though given that BT while making a call, you roam seamlessly single handset that also works when cus- has over 20m residential customers, it back on to the ordinary mobile network. tomers are out and about. FMC is, of seems a modest number). And when a friend comes to visit, her course, a bundle: it ties together xed, mo- Even so, Mr Verwaayen admits that phone roams on to your base-station, but bile and broadband services in a particu- what customers like most about Fusion is the charges for any calls she makes appear larly sticky way that makes it a powerful the rather prosaic benet of good indoor on her bill. customer-retention tool. mobile coverage, so that their mobile For consumers, xed-mobile conver- phones work properly even if they live in gence promises the convenience of a sin- Fusion or confusion? an area with poor network coverage. I gle handset, a single address book and a But how is FMC working out in practice? thought they would be wowed by technol- single voicemail box, plus good reception One of its strongest proponents is BT, ogy, he says, but consumers have their and cheaper calls when at home. We take which launched a service called Fusion own logic. The lack of enthusiasm for care of connecting you to the cheapest net- last year. (It currently uses Bluetooth for FMC is not surprising, says Mr Thelander, work, wherever you are, says Mr Lom- the short-range indoor radio link, but will because most of the benets accrue to op- bard of France Telecom, which recently go over to Wi-Fi technology early next erators. These services are oered by op- launched a xed-mobile service called year.) BT sold o its own mobile network a erators to increase their revenue and re- Unik. There are also benets for busi- few years ago, so it buys airtime from Vo- duce customer churn with very little in it nesses. Surveys by Gartner and IDC found dafone. Indeed, it is the lack of a mobile for consumers, he says. that over half of employees’ mobile- network that makes BT such an enthusias- Another criticism of today’s FMC sys- phone calls are made in the oce, even tic backer of FMC, because it enables the tems, including Fusion and Unico, is that though cheaper xed-line phones are company to re-enter the mobile market customers still retain both their xed and available; 28% of workers use their mobile with a distinctive product that sets it apart mobile numbers (though France Telecom’s phones as their primary phones. Integrat- from other operators. Unik service uses just the mobile number). ing xed and mobile phones could help However, Fusion has not been very BT argues that Fusion is not designed to do companies control and reduce their spend- well received. For one thing, it is quite ex- away with the xed-line phone, but to en- ing on mobile telephony. Some FMC sys- pensive, says Paul Merry, an analyst at In- hance the mobile phonea natural posi- tems, for example, allow calls from mobile forma, because customers have to have tion for a xed-line incumbent to take. phones to be routed through a company’s both a standard xed line and broadband But regulation is also a factor in some central switchboard. This makes outgoing service from BT before they can subscribe markets. In South Korea the OnePhone ser- calls, particularly international ones, to Fusion, which then adds its own baing vice launched in 2004 by KT, the local in- much cheaper. range of mobile-like calling plans on top. cumbent, has been hobbled by regulators’ Operators like the idea of FMC too. For So to anyone who has already dumped refusal to allow discounted taris, as well incumbents it has several attractions, their xed line, switched to a cheaper as by poor sound quality and the lack of notes Mr Pileri of Telecom Italia. Primarily, xed-line provider or does not have broad- seamless roaming between indoor and he says, it provides another reason for our band, Fusion looks pricey. And the Blue- cellular networks. Mr Pileri says that in It- customers to buy broadband access. tooth technology, which BT chose because aly regulatory constraints prevent Telecom Next, it discourages subscribers from de- it wanted rst-mover advantage, is the Italia from oering Unico with a single fecting to rival mobile operators or even most clunky system ever, says Mr Merry. number. Regulators also prohibited xed- giving up their landlines altogether. FMC BT’s Mr Verwaayen naturally leaps to mobile convergence in Japan, arguing that1 The Economist October 14th 2006 A survey of telecoms convergence 9

2 nobody else would be able to match the ing, such operators are responding by combination of NTT, the xed-line incum- Small numbers, bigger profits 5 launching homezone products that oer bent, and its dominant mobile arm, NTT Global fixed-mobile convergence consumers most of the benets of FMC for DoCoMo. But the rules are being relaxed. Subscription forecasts, m much less hassle. Such schemes allow sub- Now that Softbank, an aggressive broad- Consumer Enterprise scribers to nominate a particular location band provider, has acquired Vodafone’s 80 (ie, a particular network cell) as their Japanese mobile unit, it too will be able to home. Within that cell, their outgoing calls oer xed-mobile convergence. 60 are charged at a lower rate. This helps mo- bile operators lure voice trac away from Give me convergence, but not yet 40 xed-line operators, a process known as In short, the fact that xed-mobile conver- xed-mobile substitution. What mobile gence is at last technically feasible does not 20 operators are now doing, says Mr Merry, is guarantee its rapid adoption. There does sticking with xed-mobile substitution for not seem to be all that much in it for con- 0 as long as possible, to steal as much trac 2007 08 09 10 11 sumers. It will probably happen eventu- from xed operators as possible, before ally, so that the handset in your pocket Source: Informa Telecoms & Media launching their own FMC approach. merrily roams on to whatever network al- One way of achieving that would be to lows you to make the cheapest calls, plugs into a broadband connection to buy an internet-service provider that al- whether in the home, the oce, outdoors route calls, but can be used with existing ready sells broadband access. Vodafone, or at the airport. And operators are already mobile handsets, which gets round the for example, has recently taken control of behaving as though it is inevitable: a sur- need for expensive dual-mode handsets. Arcor, a German broadband provider, and vey by Informa found that nearly two- Softbank in Japan is particularly keen on established xed-line broadband partner- thirds of those who were in a position to this, as are incumbent operators in France, ships with BT in Britain and Fastweb in It- provide FMC had begun to do so. Germany and Italy. The problem is that aly to enable it to experiment with FMC in But widespread adoption of FMC will femtocells are far more expensive than both countries in case the idea takes o.

take time, says Mr Merry, because it re- Wi-Fi base-stations, so everyone is waiting Similarly, O2, an operator with mobile net- quires technologies and business models for the price to fall below 100, says Ru- works in several European countries that to be brought into a new alignment. In- pert Baines of picoChip, a chipmaker that was acquired last year by Telefónica of deed, it requires nancial engineering as hopes to sell its femtocell chips to estab- Spain, recently bought a small British well as the technological kind: operators lished equipment-makers. That will prob- broadband company called Be in order to around the world will need to reabsorb ably not happen until 2008, but some op- gain access to Britain’s xed-line market. their separate mobile units in order to inte- erators may well launch femtocell-based Mobile operators could then use xed grate them with their xed-line opera- FMC services in late 2007 in order to steal a broadband pipes to deliver content (such tions. (France Telecom and Telecom Italia march on their rivals. as music tracks) to mobile phones. Down- have both done so already, though Tele- Another factor that will inuence the loading music over wireless networks is com Italia now plans to reverse the process adoption of FMC will be the attitude of still a painfully slow business, even with for nancial reasons of its own.) That mobile operators that lack xed-line net- 3G mobile networks. But consumers might would mean, in particular, NTT absorbing works, such as Vodafone. For the time be- download more music, ringtones and DoCoMo, and Verizon buying out Voda- games on to their mobile handsets if it was fone’s 45% stake in Verizon Wireless. quicker and cheaper at home. Furthermore, notes Mr Thelander, so far the only mobile handsets with Wi-Fi Let’s get down to business support are high-end models. Until Wi-Fi For the time being, though, FMC’s bright- support is available in cheap, mainstream est prospects are in the corporate market, handsets, its appeal will be limited. In- where it can help to cut costs. Compared forma predicts that even in ve years’ time with the consumer market the numbers only 5% of handsets sold will support Wi- are small (see chart 5), but each customer is Fi. So FMC users are likely to account for a much more valuable. We really see it tak- tiny proportion of telephone subscribers ing o in the enterprise environment, and revenues for the foreseeable future. says Mr Merry. Informa forecasts that by FMC’s share of total communications rev- 2011 business users will account for a mere enues will be small for several years, but 10-15% of FMC subscriptions but as much this is just the start, says Mr Merry. He pre- as 20-27% of FMC revenues. dicts a total of 92m FMC subscribers by For xed-line operators, FMC is some- 2011, accounting for 3% of mobile subscrib- thing of a life-raft. With the traditional ers by that time. voice business in decline, it enables them But the prospects for FMC could im- to hold on to their customers as they try to prove dramatically once new femtocell minimise their losses from voice-data con- technology arrives, probably late in 2007. vergence. Fortunately another form of con- This involves using an extremely small but vergencebetween telecoms and televi- fully edged mobile base-station rather sionoers them the prospect of a new than Wi-Fi in the home or oce. It still market and new revenues. 7 10 A survey of telecoms convergence The Economist October 14th 2006

Tuning in to the future?

Telecoms rms are moving into television, but it may not be a licence to print money

T IS a little after nine o’clock in the morn- into the voice market. The snag from the te- taking FiOS at all. The average revenue per Iing in Grapevine, a leafy suburb of Dal- lecoms rms’ point of view is that whereas user, a key industry measure, is growing, las, Texas, and Thomas Hixon, a Verizon it costs very little to provide voice services and in every area where FiOS is available engineer, is hard at work installing equip- over an existing cable network, it is very Verizon has been able to reduce the rate at ment outside a customer’s house. This is expensive to upgrade telecoms networks which it is losing voice subscribers; in one of the neighbourhoods where Veri- to deliver television over broadband in- some areas, it is even adding some. zon, America’s second-largest telecoms ternet connections, a technology generally rm, has laid bre-optic cable under the referred to as internet-protocol TV (IPTV). I want my IPTV streets as part of an $18 billion network- With its FiOS project, Verizon is one of a But for the ultimate example of an incum- construction programme. By 2011 its ca- handful of operators around the world to bent telecoms rm moving into TV, you bles will pass 18m American homes. have taken the most expensive route of all, have to visit Hong Kong. When PCCW, the A directional boring machine has al- bre to the premises (FTTP), ie, running local phone company, launched a TV- ready drilled a tiny underground tunnel bre right up to customers’ homes. The over-broadband service in September under the driveway, allowing a nal others are NTT and SoftBank in Japan, KT 2003, everyone laughed; it had tried simi- length of bre to be run from the neigh- in South Korea, and operators in parts of lar ventures twice before, in 1996 and bourhood splice-box to the customer’s Sweden, Italy, Denmark and a few other 2000, and had failed on both occasions. house. This single bre can support multi- countries. The cost involved has weighed But its new service, Now Broadband TV, ple phone lines, 60-megabit-per-second on Verizon’s share price, and its credit rat- proved a success. Today it has more than internet access and over 400 television ing has been downgraded. The market is 40% of the market and is on course to dis- channels, with plenty of capacity to spare. very sceptical of FiOS spending, accord- place the local cable operator as the main By lunchtime, Mr Hixon has nished ing to Blake Bath, an analyst at Lehmann provider of pay-TV in Hong Kong. installing everything. The phones are Brothers, earlier this year. Moreover, last year PCCW became one working, the broadband is running and he But the service seems to be proving of the rst incumbent operators world- is demonstrating how to work the digital- popular: in Keller, Texas, the rst suburb wide to arrest the decline in xed-line sub- video recorder (DVR), which allows pro- where the bre network was rolled out, scribers. This is the kind of success that grammes to be paused, rewound and re- over 35% of homes have already sub- other telecoms rms dream of: a new ser- corded. Robert Blalock, the newest cus- scribed to FiOS TV, and over 40% to the vice that not only stops line loss, but beats tomer for Verizon’s new FiOS network, is broadband service. This bodes well for Ve- the cable companies at their own game grinning broadly. Buying phone, broad- rizon’s plan to achieve 35-40% market and brings in new revenue. Better still, the band and television service together gives penetration for broadband and 20-25% for service is expected to become protable by him a discount of $30 a month and a single TV in the areas covered by its new net- the end of the year. No wonder that just bill, easier than three separate ones. work, which already includes parts of about every phone company in the world Verizon’s FiOS project is one of the Texas, Virginia and Florida. has come to visit PCCW, says Alexander most ambitious examples of how tele- Sheila Lau, president of Verizon’s oper- Arena, the rm’s nance chief. PCCW is coms operators around the world are mov- ations in Texas, says the take-up of the tri- now advising telecoms rms in several ing into television services, in direct re- ple-play bundle of voice, broadband and countries about how to emulate its suc- sponse to the march of cable operators television over FiOS is nearly 80% of those cessful roll-out of IPTV. 1 The Economist October 14th 2006 A survey of telecoms convergence 11

2 PCCW’s success provides a glimpse of quick and easy way to add TV to their ser- pany says, and will dominate all aspects the future in a technical sense as well, be- vice bundles without having to build any of a telco’s business for the next ve to ten cause it is based not on bre to the pre- new infrastructure. But simply bolting on years. Alcatel, its larger rival, predicts that mises but on a less expensive method TV service in this way is clunky. Hence there will be 72m subscribers to telecoms called bre to the node (FTTN) that is be- AT&T’s new Homezone service, launched rms’ TV services by 2010, up from about ing adopted by many other telecoms rms. during the summer, which allows it to of- 5m this year, and claims that operators can This involves running bre to local ex- fer an advanced television service in areas charge subscribers up to twice as much by changes and neighbourhood junction where it has not upgraded its network to adding television to their bundles. boxes and then, for the nal link into the support U-verse. Exactly what makes IPTV so compel- home, using the existing copper phone Homezone is based on a set-top box ling is hard to explain, says Alcatel’s Mr Al- line, supercharged by a particularly fast that contains a satellite receiver and DVR wan. He draws an analogy with the TiVo form of the digital subscriber line (DSL) and also plugs into a xed-line broadband and other DVRs. On paper, they do not technology that turns phone wires into link. (The satellite content comes from sound life-changing: why would you want broadband pipes. EchoStar’s DISH service.) The integration to pause or rewind live television, and In this model, television signals travel of the broadband connection allows it to what dierence does it make being able to as streams of IP packets, but because the - oer interactive services such as music record programmes at the touch of a but- nal broadband link has a limited capacity, and lm downloads. Because of the rela- ton? But in practice DVRs have changed it is not possible to pipe hundreds of chan- tively slow speed of the broadband link, the way many people watch television, by nels into the home at once and switch be- lm downloads take place in the back- allowing them to ignore the schedules and tween them at the set-top box, as happens ground, using a queue and view model. call up their favourite shows in a jiy. with cable and all-bre networks. Only the An even more conservative approach channel that is actually being watched is to television is being taken by BT in Britain, Keeping up with the neighbours sent from the bre network down the Telefónica in Spain, Telecom Italia in Italy Similarly, says Mr Alwan, users get very at- broadband link. This has the benet of re- and KPN in the Netherlands. It involves a tached to IPTV features such as video on ducing piracy and providing a far more in- standard digital-terrestrial television (DTT) demand, being able to pause a lm down- teractive service, because individual video set-top box, capable of picking up multi- stairs and watching the rest of it upstairs streams are sent to each subscriber. channel digital TV, with a broadband con- on a dierent set, or searching for pro- nection that can be used to deliver IPTV grammes featuring a particular actor. If Cheap and cheerful services via the xed-line network. This your neighbour has a TV service where The main advantage of FTTN is that it is enables operators to oer music videos they can watch any show, anytime, with- comparatively cheap. Mr Bath estimates and lms on demand, as well as a out having to think about recording it, how the eventual cost of connecting each home catch-up TV service so that customers much is that worth? he asks. If your at $500-600 for Verizon, which is using can call up programmes they missed. It has neighbour has it, you will want it. It’s a FTTP, but only $250-300 for AT&T, which the advantage that the basic television ser- very interesting competitive advantage. is using FTTN as the basis for its new net- vice can be provided without the need for Hochen Tan, the chairman of CHT, Tai- work-upgrade project, known as Light- any investment. The operator gets in- wan’s telecoms incumbent, talks of using speed. Verizon claims that its all-bre volved only in delivering the premium ser- IPTV to deliver e-learning, or banking, or method, although more expensive, is vices, such as video-on-demand. BT’s Mr karaoke, which traditional cable service more future-proof; company ocials say Verwaayen says he does not see the point cannot provide. that FTTN will not, for example, support in investing billions just to replicate what But Lars Godell, an analyst at Forrester, multiple high-denition streams, which cable companies can already oer. is sceptical. Vendors’ claims for the take-up require far more capacity than a copper There is no doubt that telecoms rms of IPTV services are implausible, he says; broadband link can provide. are technically capable of launching tele- despite a few small success stories, such as AT&T maintains that its system will be vision services; the question is whether Hong Kong, there are still no really large-1 able to deliver two high-denition streams they will make any money out of them. to each household by the end of next year. Every single customer I talk to knows the Ernie Carey, AT&T’s head of network plan- traditional voice service is being dissi- Pick-and-mix 6 ning, insists that its more interactive ap- pated by mobile, by VoIP services, says Video-on-demand revenue forecast proach does more than simply replicate Nortel’s Mr Carbone. They see revenue By video-operator type, $bn the cable model. We didn’t just want to loss, and just taking cost out of their net- 14 have a me-too product, he says. AT&T’s work will not increase revenue. Internet download IPTV service, launched this summer under Nortel and other equipment-makers 12 U IPTV the name -verse, is impressive, with claim that there are fortunes waiting to be Cable 10 lightning-fast channel changes, picture-in- made by telecoms operators who jump 8 picture browsing of other channels and an into television. For an incumbent operator elegant movies-on-demand service. in a typical North American city, Nortel 6 As well as FTTP and FTTN, there are claims, a triple-play bundle including tele- 4 other ways for telecoms operators to get vision service doubles the average reve- 2 into the television market. When the threat nue per user, thanks to new television from cable operators rst emerged a few 0 revenues and increased uptake of broad- 2004 05 06 07 08 09 10 years ago, many operators struck resale band. Television is now the largest growth Source: iSuppli deals with satellite-TV rms, which was a opportunity for telecoms rms, the com- 12 A survey of telecoms convergence The Economist October 14th 2006

2 scale deployments to point at. To him, the by third parties across the internet. But they could also nd that the market is far claim that IPTV will capture 30% of televi- downloads of individual television pro- less lucrative than they had expected. sion subscribers within ve years of de- grammes and lms are already available Mr Godell believes that the best way to ployment seems over-optimistic: 10-15% is from MovieLink, Amazon, Apple and oth- enter the television market, particularly in more like it, he says. And even if television ers. As viewers move away from tradi- western Europe, where people are not pre- does double the operators’ average reve- tional forms of television and towards a pared to pay very much for television con- nue per user, they will not be able to pick-and-mix model, telecoms rms could tent, is to keep capital expenditure and op- pocket all of the extra money, because the nd themselves in a situation similar to erational risk to a minimum, which would content providers will need to be paid. that created by VoIP in the voice market: favour the hybrid DTT/IPTV approach. The The problem for operators is that al- their customers will be able to buy broad- projections of future growth in television though many of them are not convinced band internet access from one company adoption, says Mr Godell, ignore the fact by these numbers either, they still feel that and then choose from a host of internet- that overall household spending on enter- they have to get into the television market based rms for their video content. In- tainment is at, so it’s mostly about sub- anyway, because everybody else is doing deed, iSuppli, a market-research rm, pre- stitutionthere is no overall growth. it. You have to defend yourself on as dicts that such downloads will be worth Furthermore, Europeans spend much many fronts as possible, but as a strategic twice as much as IPTV video on demand less on pay-TV services and DVD sales and move to make a lot more money I don’t see by 2010 (see chart on previous page). rentals than they do on xed-line tele- the justication, says Mr Godell. Telecoms operators are jumping into phony, so even if telecoms operators cap- After all, video services, like voice ser- television at a risky time, in other words, ture the entire television market, they will vices, can be delivered over broadband just as the way in which it is consumed not be able to make up for the decline in pipes by other companies too. At the mo- and delivered is changing radically. Per- their traditional voice business. They ment, real-time multichannel television is haps they will benet from this by oering should move into television as a defence, too bandwidth-intensive to be provided their own video-on-demand services; but not as a source of future growth. 7 Changing the rules

How should regulators respond to convergence?

ONVERGENCE is forcing changes not mission, which published a draft of its not allowed to enter the telecoms market. C only on telecoms companies and con- new Europe-wide telecoms-regulation Similar rules preventing BT, Britain’s in- sumers but on regulators too. In many framework in June, would like to see a sim- cumbent operator, from providing enter- countries communications, broadcasting, ilar approach adopted across Europe. In tainment services were abolished a few entertainment and information services August the commission ordered Deutsche years ago, opening the way for the launch have separate regulators or dierent rules, Telekom to open its new network to rivals. of its television service this year. but as the distinction between them starts Bundling services together, and creat- In America the launch of television ser- to blur that no longer makes much sense. ing new converged services such as xed- vices by telecoms rms has been held back Drawing up new rules for a converged mobile telephony, can also raise antitrust by complicated rules that require oper- world, however, is fraught with pitfalls, as concerns. Italy’s regulator, AGCOM, im- ators to win approval from thousands of a recent OECD report explains. Already, posed strict limits on the initial roll-out of local franchising authorities. This has ghts have broken out in many parts of the Telecom Italia’s xed-mobile service, Un- prompted some states to pass laws grant- world over the regulation of converged ico, because Telecom Italia’s biggest xed- ing blanket approval for telecoms rms to networks and bundled services. line competitor, Fastweb, could not oer launch television services, and the indus- One controversial question is whether mobile services, and its biggest mobile try is now pressing for federal rules to incumbent operators should be com- competitor, Vodafone, could not oer cover the whole country. But cable oper- pelled to share their next-generation net- xed-line servicesthough Vodafone and ators are understandably opposed. They works with rivals, as they are required to Fastweb have since struck a deal to bundle grumble that their franchises require them do with their existing networks in many their services together. Given its dominant to oer blanket coverage, whereas tele- parts of the world. In America, where ca- position in both markets, Telecom Italia coms rms are able to pick and choose ble networks pass 95% of homes, regula- was deemed to be acting anticompet- which neighbourhoods they cover with tors have decided that Verizon and AT&T itively by combining the two. Similar rules their new television services. do not have to make their new high-speed have prevented KT in South Korea from of- networks available to rivals on a whole- fering full xed-mobile convergence. Unfair advantage sale basis; instead, their principal compe- In some cases special rules prevent Another bone of contention is must tition will come from cable operators. In rms that are dominant in one market carry rules that require cable operators to Britain, however, where cable networks from entering another at all. Japan’s in- carry certain local or public-interest chan- pass only 50% of homes, the regulator has cumbent operator, NTT, is not allowed to nels on their networks, but do not apply to ruled that BT must open its next-genera- enter the broadcasting market; conversely, telecoms rms. The cable companies com- tion network to rivals. The European Com- the country’s public broadcaster, NHK, is plain that having to carry these channels1 The Economist October 14th 2006 A survey of telecoms convergence 13

2 prevents them from using the network ca- pacity for other things, such as internet ac- cess or new high-denition channels. One way of dealing with problems of this kind is, appropriately enough, to es- tablish a converged regulator, as Britain did when it merged its communications and broadcasting watchdogs into a single body, Ofcom, in 2003. Three years on, its experience provides three lessons for regu- lators in other countries, says Peter Phil- lips, an Ofcom strategist. First, converged services and existing services will co-exist for a long time, so you can’t just jump straight to a solution. Instead, regulators must be exible enough to deal with both the old ways of doing things and the new. Second, under the old rules there were a lot of implicit deals: telecoms operators were granted monopolies in return for pro- viding universal service, for example, and broadcasters were given spectrum in re- turn for meeting public-service require- ments. In a converged world, those deals need to become much more explicit if you want to preserve the policy goals, says Mr them in order to provide a service bundle. networks. We need to pay for the pipe,

Phillips. Similarly, O2, another European wireless he told an audience at the Consumer Elec- Third, content on dierent platforms operator, is branching out into xed-line tronics Show in Las Vegas. Both AT&T and may require dierent rules. Broadcast tele- services in several countries. Telecom Ita- Verizon denied that they planned to act as vision is not the same as subscription ca- lia has launched xed-line triple-play ser- gatekeepers, blocking access to any big ble channels or streaming internet video. vices in both France and Germany, and sites that failed to pay up. Instead, they The shift away from broadcast television Deutsche Telekom is doing so in France suggested, Google and other rms, such as does require a more laissez-faire approach and Spain. music and video download services, from regulators, but that is not the same as In America, meanwhile, the debate might choose to pay extra to have their traf- a total free-for-all. If you have massive about telecoms regulation in recent c prioritised. amounts of content out there, on plat- months has been dominated by one issue: The result was an outcry. Critics felt forms that may not respect international network neutrality. In essence, this means that AT&T and Verizon were threatening to boundaries, you have to put more reliance that the internet simply delivers packets of abandon the hallowed principle of net- on people’s ability to understand the na- information from one place to another, re- work neutrality. It is this principle that has ture of content and decide how they want gardless of their content or the identity of enabled the internet to support new appli- to engage with it, says Mr Phillips. the sender or receiver. The furore began cations and made it such a hotbed of inno- That raises another regulatory chal- last November, when Mr Whitacre, the vation. Its agnostic design, which ensures lenge: the fact that dierent rules apply in boss of AT&T, complained in an interview that it blindly does its best to deliver what- dierent countries. For example, there has with Business Week about Google, Yahoo! ever trac is fed into it, meant there was no been a huge fuss in Europe in recent and other internet companies getting a free need for the inventors of the web, or Nap- months over the extension of the Euro- ride on his company’s expensive new ster, or Skype, to ask permission to run pean Commission’s Television Without broadband network. Now what they their software across the internet. Frontiers directive to cover video sent would like to do is use my pipes free, but I Advocates of net neutrality gave warn- over the internet or to mobile phones. The ain’t going to let them do that, because we ing that the introduction of fast lanes and aim is to impose standards governing have spent this capital and we have to other premium services could undermine things like decency and advertising on have a return on it, he said. So there’s go- this innovative culture. If the fast lane is these new forms of video, but critics re- ing to have to be some mechanism for the information ‘superhighway’, the slow gard the rules as too heavy-handed. these people who use these pipes to pay lane will operate more like a dirt road, Convergence will make the need for a for the portion they’re using. wrote Meg Whitman, the boss of eBay, the common set of European rules more press- leading internet auction site, in an e-mail ing as operators begin, for the rst time, to Neutral tones to its users. A two-lane system will restrict venture onto each other’s home turfs. For A few weeks later Ivan Seidenberg, the innovation because start-ups and small example, Orange, France Telecom’s wire- boss of Verizon, said that Google, Micro- companiesthe companies that can’t af- less arm, operates in several European soft and other providers of bandwidth-in- ford the high feeswill be unable to suc- countries and now also oers xed-line tensive internet applications ought to ceed. Eric Schmidt, the boss of Google, broadband and voice services in several of share the cost of operating high-speed took a similar stance: Creativity, innova-1 14 A survey of telecoms convergence The Economist October 14th 2006

2 tion and a free and open marketplace are By dressing up the net-neutrality de- ransoms. And if they do, regulators will be all at stake in this ght, he said. bate as a ght for online freedom, how- able to take action under existing antitrust Such self-styled defenders of the in- ever, Google, eBay and other big internet lawsthere is no need for a new net-neu- ternet like to portray the net-neutrality de- rms have cleverly diverted attention from trality law. bate as a ght to stop evil telecoms rms an unpleasant truth. As telecoms rms Even so, the arguments of the past few messing with freedom and innovation. around the world upgrade their networks, months have served a useful purpose. The reality is rather more complicated. For there are two ways in which they can re- The public reaction has already been as a start, the internet is not, in fact, neutral to- coup the money. They can simply charge powerful and eective as any law, says day. Fast broadband connections already subscribers more; or they can pursue new Timothy Wu, a professor at Columbia Law cost more than slower ones, for consumers business models in which big internet School who is credited with coining the and businesses alike. As well as buying rms and other content-providers pick up term net neutrality. The debate has put fast pipes and building huge server some of the bill too. the telecoms companies on notice that farms, big companies such as Google and But the idea that big rms such as Goo- they are being watched closely, he says, eBay also pay extra for specialist content gle ought to contribute in some way to and has forced them to make public delivery services, such as Akamai, to these costs has been roundly greeted as if pledges not to block or degrade access. make their websites download even it is a threat to basic liberties, notes Craig Shame can have more power than litiga- faster. None of this has hampered innova- Moett, an analyst at Sanford Bernstein in tion, says Mr Wu. The market and con- tion or hurt small companies. New York. Despite their howls at the idea sumers can control bad practices, but con- It is also rather odd to see internet activ- of paying for such services as packet priori- sumers actually have to be aware of what ists, who are generally suspicious of gov- tisation, he says, it would in fact be the big is going on for that to happen. ernment intervention, calling for regula- internet companies that would benet The telecoms rms could even nd that tors to step in and pass new laws in the most from the new business models that the boot is on the other foot, says Mr name of freedom. Laws mandating net such premium services might unlock. Odlyzko of the University of Minnesota. neutrality could, in fact, do a great deal of Referring to companies such as AT&T and harm. Ensuring neutrality could require In the name of consumer choice Verizon, he asks: What makes them think regulators to interpose themselves in all That does not mean that big telecoms rms that they are going to charge Google, as op- kinds of agreements between network op- should be allowed to interfere with access posed to Google charging them? Cable erators, content providers and consumers. to sites that do not pay them. But Mr Whi- companies, he points out, have to pay for Content-delivery services, such as Aka- tacre insists that he has no plans to do so. the television shows and lms they deliver mai’s, might suddenly become illegal. We’re not going to block, we’re not going over their networks. Strict rules could also hinder the develop- to interfere with what’s out there today, Clearly convergence requires new or ment of new services that depend on be- he says. Instead, the idea is to charge extra updated rules in some areas and the en- ing able to distinguish between dierent for additional services. The other way, forcement of existing rules in others. But types of trac. And it does make sense, consumers are all locked into one calibre overall, by pitching companies in previ- after all, to be able to prioritise telephony of service, but consumers should be free to ously distinct industries against each and video trac over e-mails. We are talk- choose what they want, he explains. Not other, convergence will result in more vig- ing about some people getting a better ser- everyone believes him, of course. But so orous competition. That should allow vice if they are prepared to pay for it, says far there is no evidence that AT&T or Veri- market forces, rather than regulators, to de- Forrester’s Mr Godell. zon have tried to block sites or demand termine the best shape for the industry. 7 Winners and losers

Who will benet most from convergence?

HO is right about convergence, the telecoms rms making money from televi- least greater operating eciency and Wboosters or the sceptics? The truth sion also look dim, because they will have lower running costs. probably lies somewhere in the middle. to lure customers away from other televi- It’s not a panacea, but it is a necessary Operators have high hopes that conver- sion providers and invest heavily. step, says Alcatel’s Mr Alwan. It doesn’t gence will open up valuable new markets, Yet that is not to say that telecoms rms x everything right awayit’s a multi-year, but that seems unlikely. Voice-data conver- should keep clear of convergence. It might multi-step, complex project that will ulti- gence can cut operating costs, but the same still be the best way for them to cut costs, mately deliver a better infrastructure with VoIP technology is also eroding revenues fend o competitors, retain customers and which to lower costs and improve ser- from traditional xed-line telephony, and minimise their losses from declining xed- vices. AT&T’s convergence project, Light- new revenues from broadband will not ll line voice revenuesnot least because speed, for example, is not being driven by a the gap. Fixed-mobile convergence may everyone else will be doing it. They may mania for technology for the sake of it, help operators to hold on to customers, but have overstated the money-making poten- says Mr Alwan, but because there’s a seri- will not produce much, if anything, in the tial of convergence, but there are probably ous threat to voice revenues from triple- way of new revenue. And the prospects of good reasons to pursue it anyway, not play bundles from cable companies. 1 The Economist October 14th 2006 A survey of telecoms convergence 15

2 As well as cutting costs by replacing tween converged operators of various search. The most successful operators, he many separate networks with a single, kinds will be over the allocation of exist- says, are those that have the technology to converged one, telecoms operators will ing spending. Nobody seems to be oering oer multi-play service bundles, but oer also increase their agility, suggests BT’s Mr anything new that will increase the overall those services in such a way that the con- Verwaayen. Oering low-priced bundles size of the pie. sumer is the one making the choicethey of services will attract a certain number of Despite the evidence to the contrary, don’t push a specic bundle, or force ser- customers, he says, but the real benet of everyone seems to think they can win. At vices on consumers that they don’t neces- convergence is its potential to make en- the moment, the stockmarket valuations sarily want. tirely new services possible. In the past, of both telcos and the cable companies Mr Barrett at Parks Associates has come you could make a map of what your cus- seem to assume that each side is going to to a similar conclusion. In a survey of tomers wanted going forward. But nowa- win close to 100% of the market, says Mr American households with broadband, days it’s like the fashion business: moods Odlyzko. Something similar happened 43% said they had not subscribed to a change, and it’s hard to predict, he says. during the telecoms boom of the late multi-service bundle because they wanted Convergence, he adds, is the only way I 1990s: dozens of companies built identical to make specic choices for dierent ser- know to be exible and agile, so it doesn’t long-haul bre networks, each assuming vices. Intriguingly, this suggests that there matter if customers change their minds. that they would win 20% of the market. As will continue to be a role for companies Inevitably, operators will continue to a result, most of them went bust. that specialise in particular services, such launch some services for which demand This time around, convergence will as satellite television or mobile telephony, turns out to be low, but convergence have the eect of intensifying compe- and do not oer the entire triple-play or should make it easier and cheaper to ex- tition, dividing the industry into winners quadruple-play package. The triple-play periment, and thus to nd new services and losers and leading to a round of fur- hasn’t been an overwhelming success so that people actually want. ther consolidation. So who will do best? far, says Mr Wood. It’s driven by oper- Not simply those who embrace conver- ators’ desire for it to work, rather than real Bundle of joy gence most quickly to benet from re- demand. So there will still be demand for And, of course, oering bundles of con- duced costs and greater agility; there are single-service suppliers, and for single ser- verged services makes customers less other factors, too. vices from suppliers who also oer the tri- likely to defect and saves money on mar- The rst is exibility. Not everyone ple-play. keting and customer acquisition, because wants to buy a bundle of services, so oper- many services can be advertised and sold ators must allow customers to pick and The customer is king together. Bundling services together also choose the services they want. We looked Crucially, to get customers to sign up for makes sense on basic economic grounds, at many carriers across the globe, and gen- three or four services, each of those ser- observes Mr Odlyzko of the University of erally speaking there is a category of cus- vices must be competitive and attractive in Minnesota: It means you can exploit un- tomers that want a triple-play, but overall its own right, says Mr Zibi. The beauty of even preferences for dierent goods. De- most customers preferred single-play and convergence as we see it isn’t so much that mand for bundles is more predictable than double-play, mixing oers from dierent you can sell multiple services to a cus- demand for individual services, and cus- players, says Mr Zibi of Pyramid Re- tomer, but that you can allow them to mix tomers who might not nd individual ser- and match whatever services they want, vices attractive may be prepared to buy the he says. Sol Trujillo, the boss of Telstra, whole bundle. Bundling hides the prices That flat feeling 7 draws an analogy with shopping. Some of individual services, and a single bundle Household spending in OECD countries* people want simplicity, he says, and prefer appeals to dierent customers for dierent 1990=100 to have everything in one place, as in a reasons. This also makes bundles more Communications† mall or a department store. But others protable, because people may end up Education prefer to do some shopping in the mall and paying for services they do not want. Recreation and culture to seek out specialist shops for specic pro- Restaurants and hotels But everyone is doing it, and, by deni- Food and non-alcoholic beverages ducts. So you have to allow both à la carte tion, not everyone can be more competi- Clothing and footwear and integrated capability, he says. tive, more agile and better able to attract 130 Secondly, for convergence to work it new customers and retain existing ones. has to be simple for the consumer. This is Figures from the OECD show that house- 120 something that every technology rm in- hold spending on communications, hav- sists is a top priority. But their products, ing risen during the 1990s as people signed 110 and their users, suggest otherwise. I’m up for internet access and mobile phones, sure if you go to some laboratories some- has been at since 2000. The same is true 100 where, they can show you caller ID on the of spending on recreation, which includes TV screen. The challenge is to take the tech- television, DVD sales and rentals, and cin- 90 nology and make it really simple, so our ema-ticket sales (see chart 7). mothers and fathers can use it, says As VoIP has driven down the cost of 80 Skype’s Mr Zennström. Making free phone xed-line telephony, consumers have calls over the internet has been technically 70 spent more on mobile phone calls instead, 1990 92 94 96 98 2000 02 04 feasible for years, but it only really took o says Rupert Wood of Analysys; but their *Excluding New Zealand and Turkey †Telecommunications with the arrival of Skype, which made it overall spending on voice calls has stayed equipment and services, and postal services easy. We try to make things really simple, roughly constant. So the coming ght be- Source: OECD, SNA database so you don’t need to be an engineer to set1 16 A survey of telecoms convergence The Economist October 14th 2006

wise consumers will not want to sign up, even if oered discounts. This sounds ob- vious, but it could mean that telecoms op- erators have an advantage over cable com- panies, which have weaker brands and are generally less well regarded by consumers, says Mr Godell of Forrester. That explains why NTL, Britain’s cable operator, recently took over Virgin Mobile: both to complete its quadruple-play bundle and to gain ac- cess to the stronger Virgin brand. Similarly, France Telecom rebranded itself as Orange, its mobile brand; other operators are doing the same, because their strongest and youngest brands are usually those as- sociated with mobile telephony. Convergence is both a response to, and a reection of, far greater competitive pres- 2 them up, explains Mr Zennström. vices delivered by a single operator sure in the telecoms industry. The compe- Mr Lombard of France Telecom admits through a single gateway box should be tition could get very ugly, says Mr that the industry still has some way to go easier to use than a jumble of boxes from Odlyzko. But in the end consumers will in this regard. The past decade, he says, has dierent companies. The operator can en- be the beneciaries. Mr Godell agrees. In seen the introduction of all kinds of won- sure that the user interface is logical and a world where prices are falling every year, derful new technologies. But we have a consistent, and that all the various services I think the only real winners are end-us- kind of complexity in all these products work together well. (This is a large factor in ers, he says. Consumers will have an in- that is rather articial and probably transi- the success of Apple’s iPod music-player, creasing array of nicely packaged services tional, he says. Carmakers do not expect iTunes software and iTunes store, all of at lower prices. But it will be messy. drivers to open up their cars and adjust which seamlessly work together.) AT&T is Ultimately, consumers and businesses their engines. If you compare what we tightly interlinking its various services so will be able to choose from a wider range are asking customers, we are asking them that, for example, pictures taken with a of communications services and a wider to enter codes, addresses, it is far too com- mobile phone can be uploaded to the range of providers. Some will have come plex, he says. user’s website and can then easily be from the world of telecoms; some from the called up on the television screen; another eld of cable television; some will have What’s in it for me? feature allows subscribers to AT&T’s started out as internet-access providers; Mike Canseld of Ovum, a telecoms con- Homezone service to programme their some will be bulked-up satellite-TV rms. sultancy, also reaches for an automotive DVRs remotely via the web. But a balance But they will all be ghting over the same analogy. Telecoms has historically been must be struck between such clever new customers. The companies involved must technology-led, full of technobabble, he features and ease of use. be prepared for a bloody battle; regulators says. You have to be able to articulate A third and nal factor in making a suc- must ensure that the ght is a fair one; and benets to encourage take-up. Consider cess of convergence is a strong brand consumers, with luck, will enjoy greater the windscreen wipers on a car: You founded on good customer serviceother- choice and lower prices. 7 could talk about dierent motors, variable speeds and intermittent wipes, but the benet is that you can use the car what- Oer to readers Future surveys Reprints of this survey are available at a price of ever the weather. Similarly, he says, tele- £2.50 plus postage and packing. Countries and regions coms rms have to become more market- A minimum order of ve copies is required. France October 28th 2006 ing-savvy. If they cannot explain the Mexico November 18th 2006 benets of their whizzy new converged Corporate oer Britain November 25th 2006 services, nobody will sign up for them. Customisation options on corporate orders of 100 Business, nance, economics and ideas There are signs that some companies or more are available. Please contact us to discuss The brain December 23rd 2006 have realised this. Hong Kong’s Now TV, a your requirements. Executive pay January 20th 2007 European business February 3rd 2007 pioneer in video-over-broadband, has de- Send all orders to: veloped a network DVR that provides The Rights and Syndication Department TiVo-like recording and playback facilities 26 Red Lion Square without any extra hardware; instead, the London WC1r 4HQ recorded programmes reside on the net- Tel +44 (0)20 7576 8000 work. It is all very clever, but also rather Fax +44 (0)20 7576 8492 hard to explain. So the company has de- e-mail: [email protected] cided to take its time over rolling out this Previous surveys and a list of forthcoming and other innovations to avoid over- surveys can be found online whelming its customers. www.economist.com/surveys In theory, a bundle of converged ser-