The “killer app” may be dead but we still need a “founder app”

For many years, in many conferences, whenever a new technology or service was discussed the cry went up “yes, but what’s the killer application”? This was based on the observation that voice calls were the key reason people bought mobile phones (at the time) and that voice calls were well over 95% of the revenue. By analogy it was assumed any new service or technology would have a similar dominant application that needed to be identified and targeted to get the technology off the ground. Sadly, killer apps turned out to be few and far between and after failing to identify many, most proponents of new technologies took the easy route out by proclaiming that there was no killer app, just lots of small ones that added together justified the investment. The Apple Apps Store seems to be the apotheosis of this concept – the final nail in the coffin of the killer app.

 

But while it may be true that a new technology can be justified by multiple applications, there remains the tricky problem of getting something off the ground for which the use is unclear. Take near-field payment systems. The idea of using the mobile phone as a payment and identification mechanism has been around for years and tried a few times without success – there is little point having the payment capability in the phone if there are no shops that allow payment with it and no point equipping shops if there are only a few phones with the technology. This changed with the advent of the Oyster payment system in London (and similar in some other major cities). Now people had Oyster cards that could be used for payment elsewhere making the deployment of readers sensible. And as readers were deployed, building the card into the phone had obvious benefits. Thanks to Oyster, near-field payment is off the ground and may enter a virtuous circle where it rapidly becomes mainstream and then ubiquitous. Oyster is unlikely to turn out to the killer application – or even the largest application by value – but it was big enough to get things started.

 

The same can be seen in multiple other areas. With BlueTooth it was the wireless headset that persuaded people of its value. BlueTooth is now much more widely used for a huge number of applications. With WiFi it was home connectivity to a broadband connection – other devices are now camping onto this. But with technologies such as Zigbee and UWB that founder application is still to be identified. This is one of the reasons why forecasting the success of technologies can be so hard – they can languish for some time until a large organisation, Government or industry decides to adopt them for a particular application which then gets them onto the virtuous circle that leads to widespread adoption for multiple applications.

 

So ask not what the killer app will be but look instead for the founding application.

Scenario Planning – Generates a warm feeling but little value

Forecasting the future – in any discipline but especially in the relatively fast moving world of telecoms – is always important. With massive investments in new technologies and networks and with payback periods that can extend over decades or more, making the right bet is critical. As mentioned in a previous posting, we are now seeing the results of some companies having made poor bets, for example Nortel’s assumption that 4G and WiMAX would arrive more quickly than they have.

Many do try to forecast the future of wireless but the trend in the last decade has been to move from particular predictions to the use of scenarios. This can be seen in any of the forecasts from major entities such as the World Wireless Research Forum (WWRF), European Commission publications, outputs from regulators and a host of research papers.

Scenarios, on the face of it, represent a very sensible approach to forecasting. There are some variables that appear just too uncertain, such as whether mobile TV will take off. Better then to model a range of scenarios often representing extreme cases. This would work well if all the scenarios, or almost all, pointed to a similar outcome. For example, if 4G was needed under all reasonable scenarios then the analysis would have demonstrated strongly that its emergence was near-certain. But in the communications sector this never happens. Instead, the “status quo” scenario shows that no new networks or technologies are needed while the “wireless data explodes” scenario shows that networks will need a ten-fold increase in capacity or more. Effectively, scenarios demonstrate that in order to make a bet on the future you have to pick a particular scenario. Sadly, the forecasters who use scenarios never do. They simply present their 2×2 matrix and assume that their work is done.

There is another kind of forecaster which I term the “hockey stick forecaster”. These tend to be analysts and consultants who produce reports about particular services, such as location based services, providing predictions of revenues over the coming five years. They always look similar – slow growth for the next couple of years, rapidly accelerating in future years. Their predictions almost always prove optimistic so when they revisit them every year or two they slide the “hockey stick” a few years to the right and republish.

Time and experience has shown that neither of these approaches generates much value – indeed if anything they tend to lead companies like Nortel into bankruptcy. We need an alternative – experts with a considerable experience of the industry and great insight who can provide an unbiased and carefully thought through analysis of the future and some way for the industry to coalesce around their views.

Meltdown in the wireless communications industry

The news from the infrastructure manufacturers looks bleak. Motorola have stopped pension contributions for US employees in order to save cash. Analysts are debating whether Nortel would be better off filing for bankruptcy sooner rather than later. Alcatel-Lucent is heading for large losses and even Ericsson has substantially downgraded its sales predictions.

Some of this is in response to the “credit crunch”. While mobile subscribers are not materially cutting back on the amount that they are spending on wireless communications, mobile operators are concerned that they might be less inclined to try new services and that competition will continue to erode the cost of calls and texts. The result would be slightly falling revenue for an industry that has been accustomed to growth year after year. Operators also realise that borrowing money for infrastructure projects is difficult at the moment and are inclined to cancel or delay uncommitted spending.

Some of the pain relates to poor strategic decisions. Both Motorola and Nortel decided to exit from 3G and instead concentrate on WiMAXand 4G. WiMAX always looked like a relatively niche technology compared to 3G/4G and seems even less likely to make an impact as it becomes harder for new entrants to raise the capital to build their network. 4G looks like it will be postponed for some time as operators aim to generate as much revenue as they can from their 3G networks, many of which are still running well below capacity. Without any revenue from 3G sales, these manufacturers could be heading for a bleak few years from which it will be difficult to recover.

Another problem for the established suppliers is competition from the Far East. Manufacturers from counties like China and Korea have now established a strong reputation and product line coupled with a relatively low cost base. The established suppliers, by contrast, are in high cost countries and are often saddled with a high cost base and large pension liabilities.

Underlying all these problems is a fundamental change in wireless communications, away from the “generation game” of new networks being deployed every decade and away from an era of ever more new operators entering the market. The construction of large cellular networks is virtually over, leaving growth in areas such as small cells and network enhancements.

What we are seeing is a long term shift of falling revenue for the established infrastructure suppliers, exacerbated and brought into sharp focus by the credit crunch. Many of the great names from the past will not survive the transition. Others will merge – although the track record for mergers is poor. Many jobs will be lost in the process.

While this is bad news, especially for those personally involved, it has a feeling of inevitability about it. What is less inevitable but potentially just as devastating is the possible collateral damage. Smaller companies with innovative new products and software may get caught up in this upheaval, perhaps because they supply the larger manufacturers, perhaps because the spending cuts from the operators affect them, or perhaps because confidence evaporates from the sector making it impossible to raise finance. Such companies ideally need to find some way to “hibernate” for a year or two as the problems of the sector sort themselves through. Otherwise, there is a risk that many new and important products such as femtocells will be set back many years.

By 2010 the landscape of those supplying the telecoms operators will look somewhat different.

Who is best placed to deploy new services?

When it comes to deploying new mobile services such as location based offerings it would seem obvious that the best companies to do this are the mobile operators. After all, they have access to the network, access to the customers, a strong brand and enormous financial muscle and leverage over others in the supply chain. And yet, their track record is very poor. For example:

 

• Attempts to introduce email services failed until Blackberry arrived, effectively bypassing the operators by installing devices in the corporation and software in the handset and just using the data facilities of the operator’s network.
• Attempts to introduce Internet access using “walled gardens” such as Vodafone Live gained little traction, it was the introduction of the iPhone and associated browser which translated any web page into a form ready for use that revolutionised the mobile internet – again only using the data facilities of the operator.
• Attempts to introduce location-based services by the operators mostly failed, it has again been Apple that has achieved much in this space using simple information such as cell location, bypassing the operator.
• Although it is early days, it appears that watching mobile TV is more likely to occur via a download from the iPlayer to a podcast suitable for a mobile device than through anything offered by the operator.

 

Indeed, it is hard to think of a single example of a service that the mobile operators have introduced that has become successful despite many years of trying, not just with the examples above but including picture messaging, home zone tariffing, push-to-talk and other user group services, mobile payment, music services and so much more.

 

What the mobile operators have done well at is the provision of “bit pipes” – basic carriers that transfer voice and data from one place to another. Voice and SMS have been hugely successful and more recently 3G data is starting to take off now that prices have fallen and operators are concentrating on bit pipe provision.

 

So there is something of a theme emerging here. Operators are very good at providing voice and data transfer but very poor at delivering services to run on top of these. This is despite their fear that they will be marginalised if they just become a bit pipe provider and that the only way to continue to grow and be profitable is to “move up the value chain” into service provision. Indeed, in a number of recent presentations by major operators they have stated that they do not think they can survive unless they start to capture some of the revenue from services.

 

So why, despite all their efforts and strengths, have operators failed so conspicuously to deliver services? Perhaps, firstly, because it is not their core expertise. For example, they have less understanding of location-based services than mapping companies or organisations like Google that have integrated mapping data and location into much of what they do. Secondly, because they are trying to extract more revenue from the service than is viable, or that consumers are prepared to pay. For example, operators sought to impose a “per transaction” cost for location services whereas consumers preferred free services, often funded by advertising. Thirdly, and more controversially, perhaps they do not have the right image with consumers. While they have a very strong brand it is associated with being a bit-pipe – with the provision of voice and data to a mobile phone – and not with innovation, with being cool or even with being a trusted entity. That is why individuals are much more willing to try a new service from Apple or Google than they are from Vodafone or Orange. Equally, they probably would not want Apple to deliver the voice service that they rely on as a core part of their life. Brand can be critical in these areas.

 

So we have a conundrum for operators. They want to avoid at all costs becoming a bit pipe because they perceive that this would result in lower profitability and growth and yet they are extremely good at bit pipe provision with a brand and organisation well matched to delivering this. Operators would prefer to deliver services but their track record is awful, they are routinely out-manoeuvred by organisations like Apple and they do not have the right brand or skills to achieve this. But is bit pipe provision such a bad thing? Without it no services can operate and hence it will always be required and will always generate reasonable return. It may be that at present operators under-price the delivery of bits and cross-subsidise from other revenue sources, in which case this may need to be gradually reversed so that bits are delivered at a price that enables a reasonable profit. If operators really wished to deliver services then perhaps they should split themselves into bit pipe organisations and service organisations, enabling separate branding, skills and focus, but it is hard to see this happening.

 

The implication is that operators should leave the development of services to those better suited, such as Apple, Google, Microsoft or even entities such as Amazon. By working with them and making various network parameters available they could stimulate demand, leading to great bit traffic and hence increased revenues.

 

 

Where do the really big gains in wireless capacity come from?

There are many on-going initiatives seeking to gain additional wireless capacity. In the US much effort is being expended into the “white space” activity to gain access to under-used TV broadcast spectrum while in the UK Governmental bodies are working hard to enable sharing or rental of some of their spectrum. TV digital switch-over is consuming much regulatory effort in order to free up UHF spectrum and so on.

 

It is interesting to do some quick “rule of thumb” analysis on these initiatives. As a starting point recall that the cellular operators in the UK currently have some 450MHz of spectrum available to them now adding up all the spectrum at 900MHz, 1800MHz, 2GHz and including TDD allocations, with another 190MHz being auctioned soon at 2.6GHz making around 650MHz. Licence-exempt or unlicensed usage has around 750MHz below 6GHz, although much of this is in the 5GHz band.

 

The white space work in the UK suggests that in most areas there is around 100MHz of spectrum available for cognitive access. The assumptions are that this will likely be licence-exempt usage hence adding around 14% to total allocations, albeit in a frequency range where the propagation is considered to be good. Government usage is typically between 40% and 50% of the total spectrum under 5GHz although much of their usage is shared so the true figure may be lower. In the extreme case of all Government usage ceasing this would double the spectrum available for civil applications, in practice a dramatic 20% reduction in Governmental use would return around 200MHz in the key 1-3GHz bands, around the same amount as is being auctioned at 2.6GHz (but the Governmental spectrum would likely not have the advantage of being harmonised across Europe for cellular applications). Digital switch-over is set to liberate around 100MHz of spectrum, of which perhaps 50MHz might be used for cellular applications, a mere 7% of the cellular spectrum that will be available by then.

 

Now come at this from a different angle. A useful “law” by Marty Cooper of Arraycom is that wireless voice traffic doubles every 30 months. Growth may no longer be occurring in voice, but it seems now to be happening dramatically in 3G wireless data. Extrapolations and laws are highly approximate, and operators will tend to control traffic growth to exploit the available capacity, but nevertheless over the next decade, if we see anything like the growth in usage of the previous one, we will need a 10-fold increase in capacity (Cooper’s law would suggest a 16-fold increase).

 

All of this gain is clearly not going to come from additional spectrum. Even in the best case the cellular operators might gain 190MHz at 2.6GHz, 200MHz from Governmental use and 50MHz from digital switchover making 450MHz (while licence-exempt usage might gain another 100-200MHz). This would double their current allocation, which would be welcome and worthwhile, but still far short of an order of magnitude increase. History shows us that the big increases in capacity come from ever smaller cells, and with femtocells and Wi-Fi hotspots becoming increasingly available it is clear that the technology already exists to enable an order of magnitude increase in “base station” numbers. The biggest constraint, though, on small cells is typically finding a low-cost but high capacity backhaul mechanism. That is why the most important advance for wireless is not more spectrum but “more wires”, or ideally “fibres”. A widespread roll-out of fibre deep into the network would dramatically improve backhaul availability enabling the deployment of countless micro, pico and femtocells.

So perhaps all those manufacturers, operators and other stakeholders working hard on initiatives such as white space might reconsider whether they could better invest their time and resources in speeding a widespread fibre deployment? Not only would this improve home broadband speeds, it would enable much greater wireless speed and capacity.

Why is our ability to predict the uptake of services so poor?

A growth in the use of wireless services has long been seen by the wireless industry as the way to generate revenue growth as subscriber numbers plateau. However, there is a long history of very poor prediction of service success – WAP, location based services and data have for many years drastically underperformed almost all targets, while, as is often mentioned, SMS has been an unexpected success. Wireless analysts have often predict a “hockey-stick” uptake for almost all the services they consider and as the services have languished, they continually shift the inflection point in the hockey-stick curve to the right, despite the increasing evidence that the service is not finding success. Yet, occasionally, a much delayed hockey-stick growth does occur – the sudden rapid increase in 3G data “dongles” is such a case.

 

Tipping point....

 

 

 

 

Why is it, after all the experience that we now have of launching new services, that we are still so poor at forecasting their success? Predominantly this is because services are based on a very complex inter-related “eco-system” that includes manufacturers, operators, other service providers and importantly the early adopters and advocates amongst the end users. For example, for location based services manufacturers need to build easy-to-use GPS location systems within the handset, operators need to provide a framework for location based services, entities like mapping companies need to produce appropriate offerings, Google needs to provide location-enabled search and early adopters and key influencers need to be enthusiastic about the service in order to convince others to adopt it. The relationships between all these players are complex with some positive and some negative feedback loops. Models of such situations show dramatically different outcomes can be achieved with relatively little change in inputs and “tipping points” are often observed. The complexity is not helped by the tendency of those in industry to look optimistically at the services they are working on, and for analysts to prefer reports with more positive than negative outcomes.

 

The existence of tipping points – values of particular input variables at which the predictions of the model suddenly shifts from no growth to the hockey-stick – makes it almost impossible to predict accurately the success of such services. The chances are that most will be predicted to be successful for many years during which they will languish and then suddenly, for reasons that may not even be apparent, or appear of little relevance, they will take off rapidly. All we can do is learn from the models as to what behaviours would most likely result in success. But actually we know this already – to be successful all elements of the service launch must be near-perfect. The technology must work, the service must be easy to use, the pricing must be attractive and the marketing must attract the right early-adopters who must be deeply impressed. If any one element is not quite right it could be enough to prevent the service succeeding. That much is common sense. The difficultly, as always, is getting all the companies to work together in a way that is competitive but collaborative, embraces standards but allows competitive differentiation. This is very hard – the incentives on individual organisations are rarely such that they work together well. What tends to happen is that individual elements slowly get solved and when the last one falls into place the service takes off. This may be what happened with data – the last element being the service pricing.

 

The bottom line is that accurately predicting service uptake will remain almost impossible unless all entities work together on delivering the service. And history suggests that this is unlikely.

3G as an alternative to home broadband?

 

In a desire to develop competition in broadband provision to the home, many have hoped that wireless might one day evolve sufficiently to become a viable alternative. But the technologists were generally sceptical. Wireless, they noted, did not have the capacity and tended to lag behind the speed of fixed connections. Previous attempts to deliver wireless broadband, from Ionica to the more recent UK Broadband, have all either failed, or remained small-scale activities. Yet suddenly, almost out of nowhere, 3G data card sales are rocketing and for many wireless does appear to be becoming a viable alternative to fixed line broadband. What is going on here?

 

The answer is that 3G is a viable alternative for some – in particular those with relatively low total data volumes and who do not want a fixed line to their home. On the data side most 3G cards have a limit to the data per month unlike home broadband which is typically unlimited (albeit with some “fair usage” clause). So, 3 are currently offering 5GBytes/month for £15 on contract with 10p/MByte additional charge if this limit is exceeded. That equates to around 160Mbytes/day. For downloading emails and web surfing that is probably plenty for most, but audio and video streaming could quickly eat through that (audio streaming at 100kbits/s equates to around 45Mbytes/hour, video streaming at 500kbits/s would use up the daily entitlement in 40 minutes). As the BBC iPlayer becomes ever more popular, many predict a rapid increase in the average data consumption to the home. (In passing, it is worth noting that 160Mbytes equates to around 1,800 voice call minutes per month. Current offers are £20 for 500 voice call minutes so data is being offered at around a quarter of the voice call price making VoIP attractive.)

 

The other question is whether the household wants to have a fixed phone line. If they decide they do, and pay the line rental, then the additional cost of broadband on this line is typically well below £15 and provides higher data rates, unlimited volumes and often mostly free calls (except to premium rate and overseas numbers). For such a household, mobile broadband is not particularly attractive (except as a way of accessing the network when on the move). However, many people do not want a phone line. Those who are renting, students and those who spend little time at home often do not want to feel tied to a fixed line. Such individuals already make use of mobile as their only means of voice communications and extending this to mobile data clearly looks sensible.

 

Finally, there is the question of network capacity. Cellular networks have enhanced their capacity with HSDPA which broadly enables higher data rates for those with good coverage while excluding those with very poor coverage. This makes it very difficult to analytically derive cell capacity. Instead, Qualcomm and others have modelled and measured typical scenarios and concluded that data rates in the region of 1.2 – 1.5Mbits/s per cell can be supported. So if all the data users tried to access their 160Mbytes between, say, 8pm and 10pm, the cell could, at best support around 8 subscribers per carrier. If voice traffic is also to be carried then this would be lower. Assuming around 10,000 cells covering the UK, each with 3 sectors, then the total subscriber numbers per operator per carrier would be in the region of 240,000. Of course, if users actually averaged less than their allotted allocation per day then more could be supported – as is likely the case. So perhaps up to a million users per operator might be feasible, especially if additional spectrum is acquired allowing more carriers to be deployed, giving perhaps as many as five million across all operators.

 

So we can conclude that cellular is not a viable replacement for broadband for all – it does not have the capacity for more than around 25% of UK households. It is also only attractive to a certain class of user who would typically not have a fixed line to the home and it may become less attractive if video streaming becomes the norm. But for a substantial subset of the market it looks ideal.

Is the downturn different this time?

Telecoms Downturn?

 

While there is no consensus as to whether we will endure a recession, all are clear that we will pass through a downturn – a period of lower economic growth and rising prices. What might this mean for the telecoms community? The last downturn caused largely by the implosion of the dot.com bubble hit the telecoms industry hard. Can we expect more of the same?

 

The dot.com implosion of 2000 and 2001 was a seminal moment for the telecoms industry. Companies such as Vodafone and Orange had only ever known growth and increased profitability, while for many manufacturers growth had become a way of life. Companies were structured to grow quickly rather than to minimise costs. Being at the forefront of the latest developments was more important than EBITDA data, hence the incredible sums paid for 3G licenses in the UK. Suddenly in 2001 all that was called into question. Operators had to face up to a future where, perhaps, revenues would not continue to grow and new services would not forever emerge which would lead to ever rising ARPUs. The result was somewhat of a knee-jerk reaction, with operators cutting much of their spending and then having to re-justify why it was essential. The knock-on effect decimated manufacturers such as Nortel who in some cases shed half of their staff and placed severe pressure on other parts of the value chain such as consultancy.

 

The current downturn looks very different. Firstly, it is not centred on the telecoms industry, but is more general and is impacted by changes in energy, raw materials and food costs. Secondly, the telecoms companies and those in related value chains have for the most part already gone through a period of adjustment. Operators are now much leaner entities and the manufacturers have gone some way to adapt to this changed marketplace. Finally, and most importantly, if anything this downturn might increase consumer spending on telecoms. This is because factors such as increased fuel prices might cause some to make greater use of telecommunications rather than travelling while others might spend more time in the home, consuming entertainment, rather than going out to restaurants or shows. Indeed, as we pointed out in a recent book, telecoms is likely to benefit from recessions, terrorist threats and other shocks to the economy as consumers rely more on their phones and broadband connections while economising in other areas.

 

It is possible that a downturn might reduce the willingness of some to invest in new unproven technologies and business models such as mobile TV and WiMAX-style data services. This may be no bad thing. But the established players are well placed to weather any economic storm and possibly to increase in strength as a result. The downturn is different this time, at least for the telecoms industry.

Interview on Femto Forum’s First Anniversary

See this interview conducted by Mobile Europe at the recent Femtocells Europe 2008 conference in London for an update on the state of the femtocell market on the occassion of the first anniversary of the foundation of the Femto Forum.

Simon

Femto Forum Newsletter no. 3

The latest Femto Forum newsletter is now available.

Simon