Your television is ringing

17 Pages·2006·1.73 MB·English

Your television is ringing
l
A survey of telecoms covergence October 14th 2006
Republication, copying or redistribution by any means is expressly prohibited without the prior written permission of The Economist
The Economist October14th2006 A survey of telecomsconvergence 1
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 (cid:3)xed-line telephony has had its
day. Page 5
Home and away
After many false starts, (cid:3)xed and mobile
phones are getting ready to merge. Page 7
Tuning in to the future?
Telecoms (cid:3)rms are moving into television,
but it may not be a licence to print money.
Page 10
Changing the rules
(cid:1)Convergence(cid:2) is the telecoms industry’s new mantra. Whether
How should regulators respond to conver-
gence? Page 12 customers really want it is another matter, says Tom Standage
WHAT has come over the telecoms in- Meanwhile, large internet companies
Winners and losers
dustry? The spectacular crash of including Google, Yahoo! and Microsoft’s
Who will bene(cid:3)t most from convergence? 2001, with its associated bankruptcies, MSNmarched into the telecoms business
Page 14 fraud and the destruction of around $1 tril- by launching new services o(cid:1)ering 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 (cid:2)rm, bought Scien-
takeovers and mergers among network ti(cid:2)c-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 (cid:2)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 O, a prompted by a single underlying trend
2
wireless (cid:2)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: (cid:2)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
Alist of sources can be found online deals, operators around the world began way to evoke information heaven. (cid:3)Con-
building (cid:3)next-generation networks(cid:4) at vergence really means the freedom for
www.economist.com/surveys
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,(cid:4) says Ben
www.economist.com/audio BT is spending £10 billion. These networks Verwaayen, the boss of BT. (cid:3)It is a question
allow telecoms operators to o(cid:1)er 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 Asurvey of telecomsconvergence The Economist October14th2006
2they want it,(cid:4) says Mark Wegleitner, chief Robert Lloyd of Cisco. A converged, all-IP multichannel television. This explains
technologist at Verizon. (cid:3)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 (cid:2)rst step technical advantages for network oper- recent months. AT&T, which is already
towards digital paradise!(cid:4) exclaims Didier ators, he says. The (cid:2)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 (cid:2)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 o(cid:1)ers
shift that, in the (cid:2)rst instance at least, will generation networks, expects its operating television, voice calling and internet ac-
primarily bene(cid:2)t network operators. At its expenses to fall by 30% once its new (cid:3)21st cess over (cid:2)xed broadband links under the
heart, convergence is the result of the tele- Century Network(cid:4) (21CN) is completed in Yahoo! BB brand, bought Vodafone Japan
coms industry’s embrace of internet tech- 2009. (cid:3)By 2010 you will have to look very to add mobile to the mix. Similarly, NTL
nology, which provides a cheaper, more hard to (cid:2)nd a (cid:2)xed or mobile operator that bought Virgin Mobile, and America’s big
e(cid:5)cient way to move data around on net- is not running its tra(cid:5)c over an IP core,(cid:4) 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 (cid:3)packets(cid:4) of data, encoded The second advantage is that in theory, The desire to o(cid:1)er 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 channels(cid:6)and 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(cid:5)- 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 di(cid:1)erent networks for services such as rate industries(cid:6)telephone operators, in- equipment from di(cid:1)erent suppliers.
voice, data and video(cid:6)each with its own ternet-service providers and cable-TV Operators claim that selling all four ser-
order-entry, billing and fault-reporting (cid:2)rms(cid:6)suddenly (cid:2)nd themselves in the vices together as a bundle makes life easier
systems(cid:6)with a single network on which same business. Cable companies now of- and more convenient for customers. (cid:3)Cus-
everything travels as interleaved streams fer broadband internet and voice services tomers in our experience really want that,(cid:4)
of IP packets. (cid:3)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 (cid:2)rms have upgraded Texan boss of AT&T andone of the most
on that infrastructure,(cid:4) says Mr Alwan. their networks to carry television signals. vocal proponents of the merits of bun-
This convergence a(cid:1)ects not only wire- In the new converged world any (cid:2)rm that dling, (cid:3)and we can give them a better
line networks, but wireless ones too. To- can deliver an IP stream to customers over price.(cid:4) The average American household
day, operators run separate but intercon- its network can o(cid:1)er any or all of these ser- spends $176 a month on telephone, broad-
nected networks for (cid:2)xed and mobile vices. And o(cid:1)ering several of them to- band and television services, according to
phones. But the new converged networks gether, many operators believe, is a win- (cid:2)gures from Parks Associates, a consul-
are (cid:3)access agnostic(cid:4). 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 o(cid:1)er the duce costs by building a converged net-
connected to its edges via di(cid:1)erent tech- (cid:3)quadruple play(cid:4)(cid:6)the name given to the work, and to o(cid:1)er the quadruple play for
nologies. Traditional (cid:2)xed-line phones combination of (cid:2)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 (cid:3)Customers are much more open to pur-
Access agnosticism should enable a Triple-play subscriber forecast, m chasing via the bundle,(cid:4) says Mikal Harn,
mobile phone, say, to connect to the core vice-president of consumer marketing at
network via Wi-Fi in the home and then Asia-Pacific Western Europe AT&T. For the incumbent telecoms oper-
North America Other
switch seamlessly to a traditional cellular ators, however, the quadruple play is all
35
connection outdoors. The core network re- about protecting their core business of
30
mains untouched as new access technol- (cid:2)xed-line voice calls, which still accounts
25
ogies (such as (cid:2)bre-optic links or new for the bulk of their revenues.
20
kinds of high-speed wireless data technol- Their problem is that (cid:2)xed-line sub-
15
ogy) are added to its edges. In an industry scribers are being lured away by cable op-
that loves obscure acronyms, the frame- 10 erators and voice-over-internet (cid:2)rms, or
work for linking everything up in this way 5 are getting rid of their (cid:2)xed lines in favour
is known as IMS, TISPAN or NGN. 0 of mobile phones. During 2005, for exam-
(cid:3)IP in a converged world enables one 2005 06 07 08 09 10 ple, the number of (cid:2)xed telephone lines
network, many services, any access,(cid:4) says Source: Pyramid Research operated by Verizon, America’s second-1
The Economist October14th2006 A survey of telecomsconvergence 3
2largest telecoms (cid:2)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 o(cid:1)ering branded its Wanadoo broadband division building new (cid:2)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 (cid:2)rm. to align them with Orange, its far stronger (cid:2)c that never materialised. The result was
As cable operators o(cid:1)er customers the mobile-phone brand. This will allow the aspectacular crash.
(cid:3)triple play(cid:4) 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 (cid:7)100 billion for licences to build
that their best defence is to respond in kind single brand. (cid:3)It cost a lot to support all new high-speed (cid:3)third-generation(cid:4) (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 o(cid:1)er. the most popular brand in the collection to nue from voice calls levelled o(cid:1), the new
Customers who sign up for a bundle of support all our products,(cid:4) 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&Tbrand is 3G’s real value proved to be much less ex-
(cid:3)We make the product more sticky(cid:6)cus- (cid:3)a huge opportunity for us(cid:4), says Mr Harn. citing: an ability to cut operating costs and
tomers don’t seem to leave,(cid:4) 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-TVpro- 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 bene(cid:2)t 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 (cid:3)What problem is convergence solv-
customer-acquisition and other marketing easier to justify. But anyone familiar with ing?(cid:4) asks Andrew Odlyzko, an expert in1
All things to all men
Two other kinds of convergence
PART of the attraction of convergence is more reliant on software and complex vergence on a single powerful device that
that it covers so many di(cid:1)erent things. computer systems to handle service de- can perform all of these functions.
(cid:3)If you ask (cid:2)ve people what it means, livery; computing, meanwhile, is begin- But although the various kinds of digi-
you’ll get seven di(cid:1)erent viewpoints,(cid:4) 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 di(cid:1)erent on
(cid:3)wireless and converged services(cid:4) 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 (cid:2)rms into IT services. This trend move. (cid:3)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 (cid:2)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,(cid:4) says Olli-
otherwise known as information tech- Aremote control for your life Pekka Kallasvuo, the boss of Nokia, the
nology (IT). These have long been two The second is (cid:3)device convergence(cid:4). 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 (cid:3)converged(cid:4) devices, the Nseries, con-
expensive, proprietary and reliable) and each consists of a microprocessor, a sists of a variety of devices with speci(cid:2)c
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 (cid:8)aky). But anetwork 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 Asurvey of telecomsconvergence The Economist October14th2006
2the economic history of telecoms at the ligence Unit, a sister company of this
University of Minnesota. (cid:3)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.(cid:4) Guy Zibi, an analyst at Pyramid three years as a source of long-term reve-
0 20 40 60 80 100
Research, a telecoms consultancy, is nue growth. The same survey also asked
equally sceptical: (cid:3)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.(cid:4) As with 3G, he says, operators are Telecoms and media prove most important (see chart 2). The
rushing to provide new services even clear leader was voice-data convergence,
Telecoms and IT
though consumer demand is unclear and followed by (cid:2)xed-mobile convergence
Device
the technology is still immature. and telecoms-media convergence. And
Even some people in the industry, such Sources: Economist Intelligence Unit; IBM 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 (cid:2)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 (cid:3)together(cid:4) from di(cid:1)erent 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 (cid:2)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 (cid:2)rst
fone’s main focus is still on mobile. (cid:3)It’s allow you to keep an eye on the place from commercial services are now available in
very early days,(cid:4) says Mr Sarin. (cid:3)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.(cid:4) In particular, it is wrong to assume when you are watching a (cid:2)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: (cid:3)We’re not saying that there are no the screen and the (cid:2)lm pauses automati- to merit the hype, the industry has con-
customers who demand this(cid:6)we’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.(cid:4) 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. (cid:3)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,(cid:4)
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 (cid:2)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- acomputer giant, and the Economist Intel- But like it or not, convergence is coming. 7
ing to (cid:2)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 o(cid:1)er 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 (cid:3)(cid:2)xed-mobile
convergence(cid:4), in which a single handset
can be used both as a mobile phone out-
doors and to make cheap calls via a (cid:2)xed
line at home or in the o(cid:5)ce. 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 October14th2006 A survey of telecomsconvergence 5
The end of the line
Traditional (cid:3)xed-line telephony has had its day
IT WAS the industry’s bread and butter tion and competition as new entrants
for over a century. But the end is now in (cid:8)ood into the market. The spectacular fail-
sight for traditional telephone service, ure of Vonage’s initial public o(cid:1)ering(cid:6)the
which will soon be overtaken by voice- (cid:2)rm’s share price collapsed after it (cid:8)oated
over-internet calls in terms of usage, and on the NASDAQexchange in May(cid:6)did not
displaced by broadband internet access as signal a lack of con(cid:2)dence in VoIP; it
the core revenue-earning service o(cid:1)ered merely demonstrated that Vonage now
over (cid:2)xed lines by telecoms (cid:2)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 (cid:2)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 (cid:2)gures exclude computer-to-com-
the proportion of call tra(cid:5)c carried using puter VoIPcalling, 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 (cid:2)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. (cid:3)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,(cid:4) he computers and very cheap or free calls be-
ing inexorably downwards, thanks to says. (cid:3)It’s the same with phone calls. That’s tween computers and traditional tele-
VoIP’s far lower costs and higher e(cid:5)- where it’s going. It will be free.(cid:4) phones. That is why Skype sold itself to
ciency. VoIPis 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. (cid:3)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
atwo-way stream of data packets that are VoIPis 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.(cid:4)
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 VoIPprovider, 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 o(cid:5)ces. 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 VoIPtele-
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 o(cid:5)ces 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
VoIPservice 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 VoIPyou can buy broadband access from of large North American companies have
phone network at the other end; the one (cid:2)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 (cid:3)terminate(cid:4), 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 o(cid:1)er a voice ser- adopted because of the new features they
Indeed, Niklas Zennström, the co-founder vice without owning an access network. o(cid:1)er, says Mr Lloyd. With a VoIP-based
of Skype, believes that voice calls will The result has been a surge of innova- phone system, o(cid:5)ce workers can sit down1
6 Asurvey of telecomsconvergence The Economist October14th2006
2at any desk and log into the phone, which coms industry,(cid:4) says Mr Odlyzko of the lecom in France, for example, includes un-
instantly becomes their extension. They University of Minnesota. (cid:3)Voice is still limited national calls to (cid:2)xed-line phones,
can also use VoIPphones 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 (cid:2)rms o(cid:1)er free broadband to
(cid:3)It completely decouples us from loca- handle that transition?(cid:4) Forrester, a con- telephone subscribers. Of course, nothing
tion(cid:6)my o(cid:5)ce is wherever I happen to sultancy, reports that voice revenue is now is really free, insists BT’s Mr Verwaayen.
be,(cid:4) says Peter Carbone of Nortel, via his falling by 10% a year at France Telecom, 6% (cid:3)Where voice, data and video are inter-
VoIPphone. VoIPalso allows call-centre at Deutsche Telekom and 5% at BT. The changeable, it’s very di(cid:5)cult to allocate
operators to work from home, making it same sort of thing is happening in Amer- cost to one service or another,(cid:4) he says.
easier to match the number of workers to ica, Japan and other developed countries. (cid:3)The word ‘free’ can only be used once,
(cid:8)uctuating demand. Incumbent telecoms (cid:2)rms around the and you can randomly choose the compo-
world have responded to VoIPin a num- nent you make free.(cid:4)
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 VoIPand blocked access threat from (cid:2)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 o(cid:1)er the
have been able to reduce their own costs incumbent telecoms (cid:2)rms and ensure that same range of services as a network oper-
by adopting VoIPinternally to carry calls phones can continue to be tapped (which ator. (cid:3)I question the long-term viability of
around their networks. Telecom Italia, for is very di(cid:5)cult to do with VoIP). But in the those solutions,(cid:4) he says. (cid:3)Can a VoIPsup-
example, began using VoIPfor 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?(cid:4) 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 o(cid:1)ering
completes its (cid:3)21st Century Network(cid:4) in reducing their call charges and raising their cheap (or (cid:3)free(cid:4)) VoIPservices than from
2009, all calls will travel across the net- monthly line-rental charges instead. Many pure-play VoIPcompanies.
work as VoIPcalls, 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 o(cid:1)er 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 (cid:8)at monthly fee. in new ways, he says, by integrating voice
bene(cid:2)ts 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 VoIPservices of saging, (cid:3)presence(cid:4) services that show
derive most of their revenues from voice their own, because their customers were whether someone is available, (cid:2)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. (cid:3)Beyond the zero price
VoIPstrikes right at the heart of their busi- (cid:3)Obviously, even if it disturbs the business point you need to start o(cid:1)ering better ser-
ness. According to (cid:2)gures from Informa, a model of traditional voice, you cannot vices, unleashing and enhancing tele-
market-research (cid:2)rm, global revenues stop it(cid:6)it’s ridiculous to (cid:2)ght against pro- phony using IP networks,(cid:4) he says.
from (cid:2)xed-line voice calls were around gress,(cid:4) 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-
(cid:2)xed-line calls will account for less than VoIPmarket. For example, France Telecom gether, (cid:2)xed-line operators do at least have
half of operators’ revenues in the de- has di(cid:1)erentiated itself from VoIPcompet- 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 (cid:3)Voix Haute Dé(cid:2)nition(cid:4) (high- nues from which will grow from $202 bil-
(cid:3)This is the key dilemma for the tele- de(cid:2)nition voice) service, which enables lion in 2005 to $410 billion by 2011, In-
hi-(cid:2) 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 o(cid:1)er 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. di(cid:1)erent position. They rely even more
1.5 Bundling provides incumbent oper- heavily than (cid:2)xed-line operators on reve-
ators with another defence against VoIP. nue from voice calls, and despite years of
They might choose to o(cid:1)er subscribers a e(cid:1)ort and the construction of new high-
1.0
triple-play bundle in which voice is speed (cid:3)third-generation(cid:4) (3G) networks,
(cid:3)free(cid:4)(cid:6)ie, 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 (cid:2)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 October14th2006 A survey of telecomsconvergence 7
2an 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 (cid:2)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 (cid:2)xed-line operators have
over 80% of their revenues, and voice switched to (cid:8)at-rate billing plans, mobile
0 20 40 60 80
prices (cid:3)are likely to fall close to zero in an operators could o(cid:1)er unlimited national
internet-centric world,(cid:4) he says. He notes Vodafone voice calls plus unlimited data for a (cid:2)xed
that each new telecoms technology Sprint Nextel fee, so there would be less incentive to use
spreads more quickly than the last: (cid:2)xed- VoIPinstead. Some operators are already
Telecom Italia
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 (cid:2)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 VoIPcalls 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 (cid:3)lethal(cid:4) to mobile operators, says PCCW Indeed, operators might embrace mo-
John Barrett of Parks Associates, a consul- bile VoIP technology themselves, as the
BT
tancy. Operators o(cid:1)er data communica- cheapest way to o(cid:1)er unlimited calls. A re-
tions far more cheaply than voice, often in Source: Westhall Capital cent report by Analysys, a consultancy,
the form of (cid:8)at-rate data packages, so sub- predicts that mobile VoIPwill 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 VoIPprogram larger. Ironically, as mobile operators race by 2015(cid:6)but that this will actually be a
to disguise their mobile calls as data tra(cid:5)c. to upgrade their 3G networks to o(cid:1)er good thing for operators. They will o(cid:1)er
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 (cid:3)presence(cid:4) information. At the
voice prices to make traditional mobile So what can mobile operators do? same time mobile VoIPwill reduce costs
calling more attractive would decimate Some of them are already experimenting for operators, just as it has done for (cid:2)xed-
their revenues, and raising data prices to with mobile VoIP, says Mr Zennström, as a line operators, the report predicts.
discourage VoIPcalling would erect more means of di(cid:1)erentiating 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. (cid:3)They are between ship with Skype that allows subscribers to phones but not pay for individual calls.
arock and a hard place,(cid:4) 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 (cid:7)40 ($51) a month(cid:6) 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
(cid:2)ddly for most people. But as handsets puter with a wireless-data card rather than will happen on both (cid:2)xed and mobile
start to resemble pocket computers, with amobile phone. E-Plus is doing this mainly phones(cid:6)though 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, (cid:3)xed and mobile phones are getting ready to merge
PITY the poor old (cid:2)xed-line telephone. from (cid:2)xed to mobile networks. Some peo- long dreamed of combining (cid:2)xed and mo-
Not only is it now being hollowed out ple are even (cid:3)cutting the cord(cid:4)(cid:6)ditching bile phones to provide the best of both
by VoIPtechnology; it has also been up- (cid:2)xed lines altogether in favour of mobile worlds: the freedom and (cid:8)exibility of a
staged in recent years by the mobile phones. The proportion of (cid:3)mobile-only(cid:4) mobile phone plus the reliability and low
phone, a far more glamorous, capable and households is approaching 10% in Amer- cost of (cid:2)xed lines. This is called (cid:3)(cid:2)xed-mo-
personal device. The (cid:2)xed-line phone ica, around 15% in western Europe and bile convergence(cid:4) (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 (cid:2)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 (cid:2)xed and clearer, and you do not have to hunt ments in technology and the industry’s
phones, and that voice tra(cid:5)c is migrating around for a signal. So technologists have current mania for convergence. (cid:3)FMC may1
8 Asurvey of telecomsconvergence The Economist October14th2006
2(cid:2)nally be taking o(cid:1) after so many false
starts and empty promises,(cid:4) says Mike
Thelander of Signals Research Group, a
consultancy.
The prospects for (cid:2)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 (cid:2)xed-line broadband
internet connection. This base-station
communicates with nearby mobile
phones using Wi-Fi (so you will need a
new (cid:3)dual mode(cid:4) Wi-Fi-capable handset,
to the delight of handset (cid:2)rms).
The home base-station pretends, in ef-
fect, to be an ordinary mobile-phone base-
station. As you enter your house, your
phone (cid:3)roams(cid:4) 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 VoIPoperators, who can compete with in- well, he says, and by mid-2006 some
broadband connection, which can handle cumbent (cid:2)xed-line operators on cost but 35,000 subscribers had signed up, (cid:3)which
several calls at once. If you leave the house cannot provide the seamless service of a Ithink is fantastic(cid:4) (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 (cid:2)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 (cid:3)sticky(cid:4) way that makes it a powerful the rather prosaic bene(cid:2)t of good indoor
on her bill. customer-retention tool. mobile coverage, so that their mobile
For consumers, (cid:2)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. (cid:3)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,(cid:4) he says, (cid:3)but consumers have their
and cheaper calls when at home. (cid:3)We take which launched a service called Fusion own logic.(cid:4) 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,(cid:4) says Mr Lom- the short-range indoor radio link, but will because most of the bene(cid:2)ts accrue to op-
bard of France Telecom, which recently go over to Wi-Fi technology early next erators. (cid:3)These services are o(cid:1)ered by op-
launched a (cid:2)xed-mobile service called year.) BT sold o(cid:1) its own mobile network a erators to increase their revenue and re-
Unik. There are also bene(cid:2)ts 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,(cid:4) 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 o(cid:5)ce, even tic backer of FMC, because it enables the tems, including Fusion and Unico, is that
though cheaper (cid:2)xed-line phones are company to re-enter the mobile market customers still retain both their (cid:2)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 (cid:2)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 (cid:2)xed-line phone, but to en-
ing on mobile telephony. Some FMCsys- pensive, says Paul Merry, an analyst at In- hance the mobile phone(cid:6)a natural posi-
tems, for example, allow calls from mobile forma, because customers have to have tion for a (cid:2)xed-line incumbent to take.
phones to be routed through a company’s both a standard (cid:2)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 ba(cid:9)ing 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 FMCtoo. For So to anyone who has already dumped refusal to allow discounted tari(cid:1)s, as well
incumbents it has several attractions, their (cid:2)xed line, switched to a cheaper as by poor sound quality and the lack of
notes Mr Pileri of Telecom Italia. Primarily, (cid:2)xed-line provider or does not have broad- seamless roaming between indoor and
he says, it provides (cid:3)another reason for our band, Fusion looks pricey. And the Blue- cellular networks. Mr Pileri says that in It-
customers to buy broadband access(cid:4). tooth technology, which BT chose because aly regulatory constraints prevent Telecom
Next, it discourages subscribers from de- it wanted (cid:2)rst-mover advantage, is (cid:3)the Italia from o(cid:1)ering Unico with a single
fecting to rival mobile operators or even most clunky system ever(cid:4), says Mr Merry. number. Regulators also prohibited (cid:2)xed-
giving up their landlines altogether. FMC BT’s Mr Verwaayen naturally leaps to mobile convergence in Japan, arguing that1
The Economist October14th2006 A survey of telecomsconvergence 9
2nobody else would be able to match the ing, such operators are responding by
combination of NTT, the (cid:2)xed-line incum- Small numbers, bigger profits 5 launching (cid:3)homezone(cid:4) products that o(cid:1)er
bent, and its dominant mobile arm, NTT Global fixed-mobile convergence consumers most of the bene(cid:2)ts 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 (ie, a particular network cell) as their
80
Japanese mobile unit, it too will be able to home. Within that cell, their outgoing calls
o(cid:1)er (cid:2)xed-mobile convergence. 60 are charged at a lower rate. This helps mo-
bile operators lure voice tra(cid:5)c away from
Give me convergence, but not yet 40 (cid:2)xed-line operators, a process known as
In short, the fact that (cid:2)xed-mobile conver- (cid:3)(cid:2)xed-mobile substitution(cid:4). 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 (cid:2)xed-mobile substitution for
not seem to be all that much in it for con- 0 as long as possible, to steal as much tra(cid:5)c
2007 08 09 10 11
sumers. It will probably happen eventu- from (cid:2)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 o(cid:5)ce, 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 (cid:2)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(cid:1).
take time, says Mr Merry, because it re- Wi-Fi base-stations, so everyone is waiting Similarly, O, an operator with mobile net-
2
quires technologies and business models for the price to fall below (cid:7)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 (cid:2)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 (cid:2)xed-line market.
their separate mobile units in order to inte- erators may well launch femtocell-based Mobile operators could then use (cid:2)xed
grate them with their (cid:2)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 in(cid:8)uence 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 (cid:2)nancial reasons of its own.) That mobile operators that lack (cid:2)xed-line net- 3Gmobile 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 (cid:2)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 FMCusers are likely to account for a much more valuable. (cid:3)We really see it tak-
tiny proportion of telephone subscribers ing o(cid:1) in the enterprise environment,(cid:4)
and revenues for the foreseeable future. says Mr Merry. Informa forecasts that by
(cid:3)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,(cid:4) says Mr Merry. He pre- as 20-27% of FMC revenues.
dicts a total of 92m FMC subscribers by For (cid:2)xed-line operators, FMCis 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 (cid:3)femtocell(cid:4) 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 vergence(cid:6)between telecoms and televi-
fully (cid:8)edged mobile base-station rather sion(cid:6)o(cid:1)ers them the prospect of a new
than Wi-Fi in the home or o(cid:5)ce. It still market and new revenues. 7