Broadband crimes

Try explaining to an octogenarian in east London why she should pay for her countryside-dwelling grandson to receive broadband, when she has no interest in the service herself. UK communications minister Lord Carter is unlikely to do that, especially as it has just been revealed that he will shortly stand down from his position, but he does expect her to stump up the cash.

Indeed, the most criminal aspect of his new Digital Britain report, published today, was its recommendation that all fixed-line phone users be required to pay another £6 a year to fund the deployment of new broadband technology. The aim is to ensure that all households in the UK can receive a broadband service of at least 2Mbps by 2012.

While £6 a year is unlikely to cause much pain for most households, the principle is outrageous. A recent Ofcom survey indicated that 13% of UK residents have no interest in receiving broadband whatsoever. And yet those with ordinary phone lines will be expected to give money to privately owned companies – in which they have no stake – so that others can receive a service. What’s more, that money will be wasted if few new customers sign up, as seems likely.

The recommendations are also highly discriminatory. Households that use only mobile phones and a mobile-broadband service from the likes of Vodafone or T-Mobile, and no fixed-line services, will not have to cough up the 50p a month. Those who use no communications technology other than BT’s plain old telephony service will, even though many are worse off and attribute less importance to high-tech services than their mobile-only peers.

Despite these obvious anomalies and injustices, market watchers are busy complaining about Lord Carter’s ‘poverty of ambition’, and trying to explain why 2Mbps per household isn’t good enough. Some are even arguing that high-speed broadband is as important a utility as electricity or water. Seems it’s not only the bonus-hungry bankers who’ve lost touch with reality.

Cry for help

From our colleague at Tech.view on www.economist.com:
Your correspondent likes the idea of being able to cry for help. The obvious answer is to carry a satellite phone coupled to a GPS tracker when hiking the Santa Monica mountains. In an emergency, friends and family would then know what had happened and precisely where you were stranded.

So far, however, satellite phones have been largely for commercial and government users—oil companies, news organisations, fishing fleets, armed forces, emergency services, plus well-financed expeditions to remote regions. Costing thousands of dollars and weighing a pound or more, satellite phones have not exactly been on the must-have list for weekend wanderers.

What of late has made them more practical—and cheaper—has been the trend to low-Earth orbit (LEO) satellites in place of geostationary ones “hovering” 23,000 miles (36,000 kilometres) above the equator. Unlike the geo-sats that circle the Earth once every 24 hours (and so appear stationary in the sky), LEO satellites zoom overhead at an altitude of 400 to 700 miles once every 100 minutes or so. With each satellite being in line of sight for less than ten minutes, dozens of them are needed to ensure users always have at least one satellite to communicate with at any given moment.

Being closer to the ground, less power is needed to beam messages up to LEO satellites and back to receivers elsewhere on the planet. That translates into smaller antennas and cheaper handsets. There is also much less annoying “latency”—the gap between words uttered by the speaker and heard by the listener—that mars phone calls made via geostationary satellites.

Unfortunately LEO systems are very capital-intensive because they need a constellation of satellites. They also require a long lead-time to get all the birds built, launched and perched in their correct orbits—a killer for cash-flow.

No surprise, then, that quite a few satellite-phone companies have gone bust trying to provide a commercial service. Motorola’s Iridium network, which used 66 satellites in near-polar orbits to blanket the globe, was in service for barely a year before going out of business in 1999. An earlier attempt by Globalstar, which relied on 44 satellites in orbits inclined at 52º to the equator (to focus on the more populated parts of the planet), limped along until 2002.

Nowadays, both are back in business under new ownership, having been bought out of bankruptcy for a fraction of their former cost. Shorn of their early debts, they have bounced back by selling voice and data connections for satellite phones, pagers, computer modems and transceivers for tracking mobile assets such as aeroplanes, trains, trucks, trailers and shipping containers.

For consumers who have grown used to broadband speeds, satellite phones and modems are a reminder of the dawn of the internet age. But while 9.6 kilobits a second may be way too slow for uploading video clips to YouTube or downloading music from iTunes, it is good enough for voice as well as many a global tracking or messaging application.

Meanwhile, big improvements are on their way. The first generation of phone satellites are coming to the end of their natural life. After about eight years in orbit, their solar arrays have deteriorated through bombardment by radiation and space debris. The satellites are also running out of fuel for nudging them back into their correct orbit and orientation, or steering them closer to siblings that have conked out so that they might take on the dead sibling’s work.

A second generation of satellites, which are about to be launched by Globalstar atop trusty old Soyuz rockets from Baikonur in Kazakhstan, will whisk data around the planet at a far more respectable speed of 250 kilobits a second.

By later next year, when Globalstar has all 24 of its new satellites in orbit, high-quality voice and 3G data transmission will be possible from anywhere on the planet, except for polar latitudes. In making broadband available more or less anywhere anytime, Globalstar reckons it is six years ahead of the competition.

Your correspondent almost cannot wait. Globalstar already sells a tempting little $170 device called SPOT, which can send your GPS location to friends and family, along with a preprogrammed message and a link to Google Maps that lets them track your progress.

Imagine the possibilities when such a hand-held gizmo can beam video as well as voice, GPS location and instant messaging. Your correspondent will be posting his progress through the canyons and along the ridge lines on Twitter, Flickr and YouTube—with the peace of mind that comes from knowing his exact location and condition can be beamed instantly to loved ones in the outside world.

Etisalat out

Will any mobile-phone operator look at Iran the same way again? ‘Untapped potential’ is an expression it still brings to mind in the telecoms community. But after stripping Etisalat of its newly won mobile-phone licence, it is also building up a less favourable reputation as the scourge of the private-sector investor. Years earlier, of course, it had done the same thing to Turkcell.

In that instance, the suspicion was that Turkey’s close ties with Israel (then) incurred the displeasure of Iranian president and holocaust denier Mahmoud Ahmedinejad. The upshot was that Turkcell’s licence ended up in the hands of South African operator MTN.

This time round, Etisalat has been accused by the Iranian state of ‘not fulfilling its obligations’. Such a criticism is normally directed at telecoms companies when they’ve failed to meet coverage targets set by the government, or not introduced a new service they’ve been authorised to offer. Etisalat, however, has barely had time to celebrate its licence win, so that can’t be the explanation.

According to the AFP, Mohammad Soleymani, Iran’s telecoms minister, claims Etisalat still hasn’t coughed up the €300m it owes for its licence. That would certainly explain why Iranian authorities aren’t happy. Yet Etisalat insists otherwise.

This being Iran, the true story may never emerge. But Kuwait’s Zain has been the immediate beneficiary of Etisalat’s misfortune. Having come second during the original tender, it is now in talks with Iranian regulatory bodies about picking up where Etisalat was slung out. Zain shareholders will have to ask whether Iran’s huge promise is worth the risk.

Problems we’d like to have

Big intake of breath – Microsoft has just announced its first drop in sales in the   company’s 34-year history. According to the Financial Times, this brings to an end the “most dramatic uninterrupted growth stories in modern business.”

Or does it? Are revenues the only way to measure a company’s growth? Surely, given what’s going on globally, wealth-creation should also be a factor. And in this regard, the folks at Microsoft are still winners. Take a look at cash on hand – at the end of the third quarter, Microsoft had a cool US$25.3bn parked on its balance sheeet, up  US$23.6bn the previous June. According to Google Finance, the company sports a gross margin of 84.2%, operating margins of 39% and provides a return on equity of 50%, figures most companies would drool over.

The other figure that continues to go up at Microsoft is R&D spending. In the third quarter, despite making job cuts and other cost-saving measures, the group increase R&D spending from US$2bn to US$2.2bn in the quarter to the end of March compared to the same quarter last year.

With this kind of cash-generating power and the continued emphasis on R&D, Microsoft has an excellent chance of finding more motors for growth for the years ahead.  The recent drop in sales – all of 6% – were primarily due to declines in the PC operating systems business, which fell 16%. The company’s internet activities were also off by 14%.   The message here is simple – in the wake of its the failure of its bid for Yahoo, Microsoft needs to  find another likely partner or innovate its way into the world of web-based products and services.  

Luckily, it’s got plenty of resources to fulfill both of those goals and more.

What’s web 2.0 worth?

A flood of announcements this week from the web 2.0 wunderkinds. YouTube is striking all sorts of pioneering content-sharing arrangements with film and recording studios (making it what – a repackager of professionally made content?); eBay is talking about putting Skype on the market (before it becomes so ubiquitous it makes no money); and Facebook, the ever-so popular but probably quite poor social-networking website, is apparently turning down funding offers that value it at about US$4bn (founder Mark Zuckerberg reportedly thinks it’s worth US$5bn).

Anyone would think it’s 2000 all over again – not the depths of the “worst recession since the 1930s”, as we’re so often reminded.

Don’t get me wrong – I admire the innovation behind all of these companies. But I find it hard to understand how anyone can see a bright future for them unless there is a fundamental shift in the way consumers interact with the internet – that is, unless people start paying for usage.

Perhaps counter intuitively, given it’s the only one that customers do pay to use, Skype is the most likely to burn out. It’s quite literally becoming a victim of its own success, as the saying goes. People only pay Skype when they use it to call friends on mobile phones or old-fashioned landlines. So every time one of those Luddites signs up to the service, Skype is losing a potential source of revenue. Seeing it out promoting its new application for the iPhone is a bit like watching a lemming in a long preparation for its cliff jump.

The others, however, are still entirely dependent on revenue from advertising – a market that is shrinking in the throes of the current economic turmoil. Now I know that internet advertising is holding up better than more traditional forms, but YouTube, according to various pundits, is still loss-making, and Facebook might be, too. Mr Zuckerberg insists its financial position is sound, and turning down a generous offer of funding would suggest he’s not desperate. He might, on the other hand, just be deluded. And before rumours of his investment rebuff began to circulate, he’d been sniffing around the money trail like a frustrated bloodhound tracking an elusive scent.

What’s certainly the case is that many advertisers don’t like what they see from either company. Big brands have taken one look at some of the weirdness that gets posted on YouTube and decided they don’t want to be in the same data centre, let alone feature their logo on the same web page. Facebook’s efforts to lure advertisers have been similarly in vain – principally because advertisers so far have been largely ignored by the Facebook crowd.

I think the deal between studios and YouTube just shows that both are getting pretty desperate (and locking up the Pirate Bay four isn’t going to dramatically improve the fortunes of the record industry). And I think Mr Zuckerberg is a greedy fool if he’s valuing FaceBook at 25% more than some generous (and perhaps naïve) investors.

The potential solution to both companies’ problems is to start charging customers. They’re reluctant to do so, of course, because their core teens-to-twenties audience doesn’t have much disposable income and has grown up using the internet for nothing (apart from the cost of access).

But that’s actually pretty cowardly. If people value something enough, they’ll stump up a small amount to use it. Let’s see Mr Zuckerberg figure out how much his 200m customers are willing to spend, and then we’ll have a fair idea of what Facebook – and its ilk – might be worth.

Broadband flimflam

Kevin Rudd, Australia's FTTH-mad prime minister

Two items of news from the broadband sector caught my attention this week. The first – and, unsurprisingly, the most widely reported – was the announcement by Australia’s government of a plan to spend a budget-busting A$43bn on the construction of a near-nationwide fibre-to-the home (FTTH) network over the next eight years. The second – missed by some leading newswires – was the detail that 550,000 homes are now served by FTTH networks in France, and yet just 170,000 have taken up the service.

The question that links the two is obvious: what is the point of spending so much on a high-speed network if few people will pay for a high-speed service? Whether the funding comes from the private sector, as in France, or mainly from the public purse, as planned in Australia, observers have every right to question the economic and commercial logic of such investments.

France’s operators could argue that it’s early days for FTTH, and caution against jumping to gloomy conclusions based on take-up so far. But these subscriber figures are pretty worrying. At least one of France’s operators is trying to attract customers to FTTH by offering it at the same price as DSL, a copper-based broadband technology. But France Telecom – which has made the greatest progress in FTTH rollout – is charging more. The early indication is that many customers are not prepared to pay.

For some, this is missing the point. Fibre is a lot more resilient than copper, they say, and will be able to support services in the future we can’t even imagine today. It will also be much cheaper to operate and maintain than older infrastructure. But Australia’s government is justifying its FTTH plan on the basis that it will be an important stimulus to the economy, just as the railways of Britain were back in the nineteenth century.

It’s this latter point I find really troubling. While so much investment gets channelled into the FTTH infrastructure that customers seem unwilling to pay for, there is little sign of the economy-boosting services that FTTH will support. In fact, there is nothing to stop services that sound important, like e-medicine and e-education, from being delivered using DSL, and yet they have not received anything like as much government attention as FTTH. No doubt, ecommerce has taken off in heavily penetrated broadband markets like the UK and Germany. But what type of ecommerce could FTTH support that DSL can’t?

As for teleworking, that, too, can be done by most people quite satisfactorily using DSL. The barriers that have prevented it from becoming more widespread are cultural – not technological.

Indeed, strip away all flimflam from FTTH, and about all it can do that existing infrastructure can’t is provide a multi-channel high-definition TV service – something that is available to lots of customers already over various forms of broadcasting technology.

No doubt, the nineteenth-century railway builders also had their detractors. But their supporters must have been able to rely on much bolder arguments. After all, the railways were providing a transport system where none had existed beforehand. All FTTH seems to be doing is adding an expensive layer of polish to the track.

Stingy India

If you invited me to your party, and – as a popular sort of chap – I made it the talking point of the year, I would understandably be somewhat miffed if I were excluded from a subsequent get-together you were hosting.

Some of India’s private-sector telecoms operators have every right to feel like the popular party guest ignored the second time round.

Why? Because India’s stingy government has denied new telecoms licences to the very companies that drove the mobile-phone boom in the first place.

Bharti Airtel, Reliance Communications and Vodafone Essar are by far India’s three biggest operators by customers, having popularised mobile-phone services after receiving their original operating licences.

Yet the two licences for third-generation (3G) services that have been awarded have gone to BSNL and MTNL, which sit lower in the league table. BSNL was even leapfrogged by Vodafone Essar after the UK-headquartered operator bought its controlling stake in the business, proving just how flat-footed it is.

That makes little difference to India’s government, though, because BSNL and MTNL happen to be the two operators in which it still holds stakes.

The privately held companies knew the state-owned ones would get licences without even having to smarten up their appearance. They were initially unconcerned because they’d been expecting an auction for a handful of other licences to happen around the same time.

That’s now been delayed until later this year, supposedly because the telecoms regulator and the finance ministry are still bickering like reality-TV contestants over the minimum price that should be charged auction participants.

In the meantime, BSNL and MTNL have an unfair headstart in India’s biggest cities. Bharti, Reliance and Vodafone will be hoping they prove as inept in this market as they’ve been in the mainstream one.

But that will come as a huge disappointment to Indian consumers and businesses, who’ve been deprived of 3G – or, indeed, any decent internet service – for many years. Considering the economic benefits of broadband, LECG, an economics consultancy, reckons the cost to the Indian economy of deferring private-sector licence awards could run into billions of dollars.

There’s been no shortage of foreign investors queuing up to enter India’s mobile-phone market, given its huge promise. But if India’s bureaucrats keep acting like this, not getting invited to the party will cease to be a concern.

The Chapter 11 scandal

I was discussing the rise and fall of Nortel with a former colleague the other day and ended up feeling very unsympathetic towards the Canadian firm. My ex-colleague had earlier interviewed Tzvika Friedman, the chief executive of a small Israeli manufacturer called Alvarion, which has collaborated with Nortel on a relatively new mobile-broadband technology called WiMax. Alvarion is owed US$2.4m by Nortel and unlikely to get paid (at least in the next few months) because the Canadian company is now in Chapter 11 bankruptcy protection. A fuming Mr Friedman had vowed to get his money back one way or the other – said my ex-colleague – but he may be out of pocket for some time.

Chapter 11, of course, gives a company protection from creditors demanding repayment. Whether a greedy, bonus-dispensing bank or a struggling former partner, you have no more immediate claim on a company in this position than Robert Mugabe has on the presidency of Zimbabwe.

 

Before anyone thinks I’m suggesting that ailing employers should be left to collapse by an uncaring system, I do think Chapter 11 has its place. A company stripped financially bare should be entitled to take shelter while it sorts through its problems. My issue is with companies that still have cash on their books and yet are allowed to put others at risk before paying off their debts.

 

Nortel might well have had US$4.5bn in long-term debt when it entered Chapter 11, but it also had US$2.4bn in cash. A sliver of that would have helped Alvarion, which is hardly in peak fitness. Last quarter it posted a net loss of US$4.8m. And it laid off 11% of its workforce in December.

 

Of course, the thorny issue is the apportioning of these cash piles. Nortel has a long list of creditors and others would undoubtedly argue they are more deserving than Alvarion. And, obviously, Nortel was incapable of repaying just over US$2bn of its debt when it entered Chapter 11.

 

Even so, there seems something fundamentally wrong with a system that allows companies to put others in jeopardy while they have money in the bank. If you’ve messed up badly – as companies seeking Chapter 11 usually have – then you should bear the consequences. And if that means entering Chapter 11 with an almost-empty purse, then so be it.

The end of the line?

Verizon’s chief marketing office says the end of copper telephone lines is nigh. In an interview with the LA Times, Chief Marketing Officer John Stratton said the company’s customers will all be served by wireless or internet-based phone connections by 2016. Bloggers were quick to react skeptically. Afterall, it suits Verizon’s strategy to sell “connectivity” packages rather than plain old voice calls over copper.

    

But the very fact that a senior telecom exec is willing to put a date on the end of copper lines is interesting. For another view, I took a look at the EIU’s forecast for fixed line penetration worldwide. We only go out to 2013, but the numbers show some significant declines ahead for copper. Worldwide, we are expecting a drop from 1.1bn copper lines last year to just under 594,000 in 2013, which will take global penetration of fixed lines from 23% to 11%.

       

Most rich countries, like Australia, France and the US will see their fixed line penetration rates plummet from around 50% to 24-25% over the same period. Poorer countries will bump along the bottom - penetration rates in India, for example, will creep up from 6% to 7% with Africa holding steady at less than 3%.

This all makes sense. Given the stunning popularity of the mobile phone, what’s the point of rolling out more copper, particularly as 3G and WiMax can provide the internet to those customers with the dosh to pay for it. So perhaps Verizon’s prediction isn’t so far off the mark. If not seven years, then surely within the next 10 or 15 years the fixed line connection will go the way of the rotary dial.

Cyber blues

Pre-Christmas online shopping in the US and Europe has been a disappointment to those who hoped that the world’s consumers hadn’t stopped spending but were just sitting at home and buying online. 

Last week’s Cyber Monday, according to HitWise Intelligence, showed a 1% decrease in the number of visitors to the top 500 retail web sites, year-on-year, the first reverse since shoppers started logging on. In the UK, ConScore reports that visit0rs to online retail sites were down 10% in November compared to the same month last year. France, Germany and Spain are reporting bigger drops.

Still, there are clear winners and losers in the cyberspace arena. Amazon.com’s traffic on Cyber Monday (December 1) was up a cool 21% this year over last and Walmart.com’s traffic was up 6%, according to HitWise. In fact, Amazon.com accounted for nearly 11% of  visits among the top 500 US Retail Web sites.  No prizes for guessing who was second. The world’s biggest cut-price emporium – Walmart.com – was in second place with 8.55% of visits followed by its rival Target.com with nearly 5%. In a downturn, online or off, consumers flock to discounters they know best.