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.

Crisis, what crisis?

Michael Joseph, CEO of Kenya’s Safaricom, is a happy man. Although first-half profits weren’t stunning, Mr Joseph says that Safaricom’s subscriber base grew an impressive 50% this year and that it’s operating margins are close to 50%. The key to future progress, he said at a recent FT conference in London, is providing a good service to the poorest customers as well as the richest.

Against his CFO’s wishes, he introduced ultra-low value pre-paid scratch cards. These have been a huge success. Over half of his customers, he says, top up by increments of just US$0.25 a pop and 74% spend less than US$0.62 at each top-up. “People in Africa live minute by minute,” says Mr Joseph. 

Safaricom’s mobile banking programme – MPESA – is also going from strength to strength. According to Mr Joseph, 45% of Kenya’s population now have phones but 51% don’t have bank accounts. About 4.1m Safaricom customers now use MPESA, he says, and 10,000 new accounts are being opened daily. The average transaction – just US$35 – is still small. But the business shifts Euro1.5m a day.

The company isn’t ignoring its well-heeled customers either. It began offering Blackberrys this year and by September had 9,000 customers for the premium service. But Mr Joseph has even more to celebrate. Safaricom managed to raise a cool US$65m via an IPO in June, well before the world stock markets started to implode. And even though its shares have slipped since then, the company remains East Africa’s largest company by market capitalisation. Not bad for a company that gets 62% of its revenue from just 13% of its customers.

A battle to the bottom

Not every business will turn into a turkey in the current economic climate. Bankruptcy lawyers and financial regulators look secure. And the mobile phone business looks better than most. At a homeless centre I know in London, people queue up for only two things – a hot meal and a place to charge their phone. If homeless people find a phone a necessity, there’s little doubt that a mobile will be the last item to be sacrificed by the rest of us.

 

Still, tougher times could well dictate a move to fewer upgrades and cheaper phones. Last week, Sony Ericsson – the world’s fifth largest handset maker – and Nokia – the world’s biggest – both reported back from the frontlines on this. Sony Ericsson said the average selling price of its phone has already slipped from 116 euros to 109 euros while Nokia reported it lost market share because it’s refusing to get involved in a price war.

So far, LG Electronics, the fourth biggest player in the world handset market, appears to be above the fray. In an announcement today, it said third-quarter net profits had slid a whopping 93%, while revenue jumped 21%. But this was mostly due to currency woes. Its handset divison – which specialises in smartphones – doubled its profits to 384bn won, beating expectations. Shipments were only up 5%, so LG can’t be accused of buying market share. 

If a nasty price war does break out in the fourth quarter, Korea’s Samsung and other small Asian players are likely to be among those launching the attack. That means cheaper phones. But, a price war also means losses for the turkey on the bottom. And that, in the end, will result in fewer handset makers.

Storm warning

Generosity is typical in the run-up to Christmas, but it’s surprising to see quite so much charity from a listed company trying to make a profit. As the financial crisis deepens, Vodafone has just revealed plans to give the new Blackberry Storm handset away free to any UK customer signing a two-year contract.

This ‘deep discounting’ has become commonplace as operators scrap for market share. But can it realistically last? Expectations are that consumers feeling the pinch will resist any temptation to surf the net or download music on their phones if doing so costs them extra.

Nor can operators be making much anyway. O2 did some damage by offering its iPhone customers unlimited data usage, in addition to a hefty slab of voice minutes and texts, for about £45 a month. That’s still quite pricey, but it’s hardly a fortune given operators’ original high expectations for 3G. Then T-Mobile pops up and says it will provide the G1 for just £40 a month. Now we have Vodafone promising the Storm for as little as £35 a month (although the precise terms are unclear) – not much more than chatty contract customers spend on a basic voice and text service.

Something has to give. This can only lead to the erosion of margins and the realisation that data services will never pay off – other than as a means of customer retention. Question is: when they’re costing this much, is it better to let them go?

Boxing Day hangover

A cracker for the consumer, a stocking filler for the record companies and a Boxing Day hangover for the telecoms operators. That’s one way of looking at Nokia’s new Comes With Music service, released in the long run-up to Christmas, which has received acres of coverage in this weekend’s newspapers.

There were a few half-cocked announcements last week and I felt Nokia’s landed squarely in the same category. Available for US$200 less than the iPhone, some supporters drooled in amazement, while I was left thinking the iPhone has been subsidised down to zero in the UK.

Presumably, Comes With Music customers might want a phone service besides unlimited track downloads, in which case the price tag begins to look a little crumpled. After all, unless operators give the phone away for nothing, the average consumer might well have spent more on Comes With Music, by the end of his 12-month deal, than he would on iTunes. According to the Financial Times, however, none of the leading operators in the UK has yet agreed to provide the service! Hardly surprising as they’re trying to get into this market themselves, and might not appreciate a handset maker piping music over their networks for a mere airtime fee.

Expect mud-slinging over net neutrality before some operators grudgingly back down and put Comes With Music in the same category as iTunes, labelled ‘Win market share as a dumb pipe’.

As for Nokia, I’m not sure how this one stacks up as an ‘iPhone killer’. It might do well against the iPod, but don’t people want more from a phone than just music? Perhaps I’m being unfair about the handset. After all, Nokia’s past record proves the Finns were put on this planet for more than just sauna design and cross-country skiing …