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Thursday, September 01, 2011

The fallacy of "monetising OTT" against the greater threat from Under the Floor (UTF) players

As far as I know, I was the first to coin the term UTF (Under the Floor) player in telecoms. It's simple really - that's where you put the pipes in most buildings, under the floor. Initially, I used it as a light-hearted riposte to the derogatory use of the term "OTT", and I though it might get adopted by Internet companies as a way to sneer at telcos.

Although I now grudgingly say OTT as well, I cringe inwardly every time I do - it has become an industry-standard term, unfortunately. But in my mind it just highlights the confrontational "them vs. us" of telcos and many of their suppliers. I confidently believe that no operator will make "cold hard cash" or otherwise monetise OTTs - insulting your potential customers is never a winning strategy. Vendors that spout this type of #telcowash by perpetuating these epithets will also likely suffer over time; pandering to your customers' crude prejudices is not a mark of strength and vision.

Conversely those companies (operators and vendors) that take a softer line dealing with companies that they genuinely and sincerely see as their peers and equals - perhaps referring to them as Content & Application Service Providers - have a better chance of commercial success. That said, my experience tends to be that operators divide on departmental or even individual lines. Some of the more forward-thinking marketing or product staff understand the value of Internet-based applications and seek to work collaboratively. Conversely, the traditionalists who believe that everything should be a centralised and interoperable standardised "services" - or who pretend to misunderstand the selling of vanilla Internet access - are the true dinosaurs.

But all this masks a more subtle - but perhaps ultimately larger - threat. It actually suits many vendors' wider purposes to cast so-called OTT players as the villains, posing an existential threat to operators. But all the time, another source of value erosion is occurring beneath the surface - quite literally under the flooor.

So over the last couple of years, I've had a bit of a rethink on the use of the term UTF. While from the content/Internet perspective, operators are indeed "underneath" them, they don't really pose a particular threat except in cases of egregious abuse of Net Neutrality, or where they are protected by competition law.

What's at the bottom of the stack from the telco perspective is a collection of true UTF players, that are eating away at the underpinnings of value for the telecom industry: the network itself, and the supporting OSS/BSS systems. Outsourcing, managed services, and especially wholesale networks operated by governments or infrastructure-based telcos are the perpetrators here.

I've talked before about the roles and risks of wholesale-centric networks (see this piece I wrote for Telco 2.0) in LTE, but it's worth drilling into the outsourcing side of UTF in more depth.

Now, I need to qualify this. Clearly, some things are indeed often best outsourced (eg maintenance), and in some cases hosted services can enable telcos to reduce upfront capex and risk when launching a new offering.  And in some cases, structural separation is forced on unwilling telcos, or governments such as Australia invest in a universal broadband infrastructure. In other instances, wholesale-centric wireless networks are being built because that's the strategy of a new entrant (eg LightSquared) or because of - one again - government intervention (eg Yota in Russia).

But collectively - and especially with the conscious, full-scale outsourcing of mobile network build and operation - I see a substantial risk. Nobody knows what business models might be found appropriate in 2 years' time, with LTE or other wireless networks. Nobody knows what applications may prove important, or where/how they are used. Nobody knows what the effects of Apple, Google or others spending their war-chests of cash might be, and what strategic responses are appropriate.

The basics of the mobile communication industry - and the basis for network capex and opex - is shifting. In the past, we knew that next year would basically be like this year, with a bit more traffic and some more users. That's easy to plan for, and can potentially be handed over to a third party for an extended contract, if you do your sums correctly.

But now, flexibility and responsiveness are key. Think back just 3 years. Who predicted traffic growth from PC dongles? Who predicted usage patterns of iPhones and Androids? Who thought seriously about WiFi offload? Who talked about signalling load breaking networks? Who thought about innovative wholesale approaches? Who thought about localised mobile services in sports stadia or retail outlets? Indoor data coverage, hotspots and not-spots? Who thought about all the various use cases for mobile policy management, and the formats of mobile data and application they might apply to?

And who thought about the impact these could have on network design, architecture, dimensioning and operational priorities? Operators have been forced to react to these changes, and will likely to continue to face uncertainty and a dynamic landscape for mobile data in the future.

How much damage would be done, if an outsourcing deal had been written insufficient flexibility and response-times to cope with these issues? Even the basic metrics ("subscribers", "traffic") are becoming irrelevant or in need of more granularity.

How much inherent value is there to the operator in being able to make their own decisions, differentiate and manage their own network in the way they see fit? In my view, that is at the core of being a responsive, profitable operators. Yes, it's possible to construct some managed service contracts to build in flexibility, but ultimately, how well does that work, when the really unanticipated occurs?

It is interesting to read that Sunrise, the Swiss operator, is cancelling an outsourcing contract [original press release PDF here ] This is a telling line "In view of the future modernization of the mobile network and the large upcoming investments in the next mobile generation LTE, Sunrise is dependent on great flexibility." There is also a reference to wholesale as a driver for more flexibility.

In other words - Sunrise wants to become a UTF player itself, not be supported by one.

Somehow, I don't see the vendor community being as keen on the UTF acronym as they are about OTT. Operators should ask themselves why that is. My view is that it serves UTF providers' purposes to push operators into believing that all the value is in chasing end-user services - even if yesterday's services are now turning into applications or mere features.

Footnote: if you'd like to see a (rather contrarian) presentation on the UTF threat I gave at a recent conference on network-sharing, it's viewable here



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