Still, it is a sobering observation most IPTV providers already would agree with. About the best one can hope for with new video entertainment revenues is to stabilize revenues lost from shrinking voice lines.

That’s a daunting realization, considering that AT&T quantified its in-region video entertainment opportunity as $35 billion worth of annual revenues, while Verizon says its opportunity is $20 billion a year.

Assume each of them achieves a 30-percent market capture rate. That would suggest $10.5 billion worth of annual revenue for AT&T and $6 billion annually for Verizon.

Assuming it primarily is competition from cable operators that is causing line loss, and further assuming the cable operators have achieved half of all the gains they ultimately will in the mass market for wired voice, and then making the assumption that video revenue ultimately replaces most of the lost voice revenue, then AT&T is looking at a loss of another $5 billion or so of annual consumer voice revenues while Verizon is looking at something on the order of $3 billion a year worth of further consumer voice losses.

In the market share battle between cable and telcos, cable jumped out first. AT&T and Verizon did not begin to register video subscriber gains until 2007, where cable companies had been poaching voice customers since 2005 and earlier, in the case of Cox Communications.

For AT&T and Verizon, though, the tactical importance of new services has changed. Up until roughly 2006, revenue declines from primary consumer access-line losses and other voice services were at least partly offset by solid growth in high-speed data services revenue, as well as revenues from long distance and enhanced services, not to mention wireless.

But the high-speed access market is nearing saturation. Beginning in 2006 for Verizon and in 2007 for AT&T, growth in revenues from video services in turn started to offset some of the effects of slowing revenue growth from high-speed data services.

Over the past couple of years, AT&T has demonstrated a more stable consumer revenue stream than Verizon, the Fitch analysts note. On the other hand, while Verizon had experienced greater declines in 2006, beginning in 2007 the company has been more successful in generating consumer revenue growth even while primary residential access-line losses remained high.

Both companies have been growing average revenue per subscriber, which has generally offset the effect of primary consumer access-line declines on consumer revenue.

Verizon is ahead of AT&T at this point in terms of deploying its network, and this is demonstrated by the growth Verizon has experienced in its legacy consumer business (excluding the mass market operations of the former MCI) beginning in 2007, the analysts say.

Quarterly revenues in the consumer business grew on a year-over-year basis for each quarter in 2007, and in the first quarter of 2008. ARPU for Verizon has also shown robust growth.

As a result, Fitch believes Verizon’s success so far indicates that as AT&T scales its network, its prospects for a strengthening of its consumer revenue base will improve as well.

In 2008, Fitch expects growing revenues from video services to enable AT&T and Verizon to sustain relatively stable consumer revenues.

Fitch believes in the longer term and in a moderately growing economy, Verizon and AT&T could return to a moderate level of consumer revenue growth, with the growth supported by video
service revenue and better access-line-retention rates.

AT&T’s Project Lightspeed (the service is branded as U-verse) features a fiber-to-the-node network architecture similar in physical topology to a cable hybrid fiber coax network, at least in its use of fiber as the trunk network and copper media as the access.

AT&T expects to pass 30 million homes with its FTTN network by the end of 2010. By that point, the network is expected to cover approximately one-half of the living units in AT&T’s service territory and pass one-third of businesses.

At the end of the first quarter of 2008, the network passed more than nine million living units, so AT&T still has some ways to go.

In deploying the FTTN network, AT&T drives fiber to nodes, which serve 300 to 500 households. On average, fiber is brought to within 3,000 feet of the home, or 5,000 feet maximum, and existing copper plant is used between the node and the home.

The network delivers approximately 20 megabits per second to 25 Mbps of capacity to the home, which provides for up to 6 Mbps high-speed data services, one stream of high definition television, voice using VoIP, video on demand, and three streams of digital TV, for a total of four streams of television.

In the future, AT&T expects to use pair-bonding to increase the potential throughput of the network, so that up to four HDTV streams can be provided, and up to 10 Mbps high-speed data service can be offered.

U-verse penetration rates have exceeded 10 percent in certain markets, even though the company has been offering service for less than 12 months.

At the end of the first quarter 2008, AT&T was operating in 43 markets. They are ramping to 40,000 weekly installations by the end of 2008, and are targeting more than one million additional homes in service by the end of 2008.

AT&T also has something like 2.2 million satellite video customers as well.

Verizon, on the other hand, is much further along with its FiOS network, expected to pass 18 million homes, or more than one-half the homes in its service territory, by 2010. By the end of the first quarter of 2008, the company passed 10.4 million homes and is adding dwellings at a three-million annual rate.

At the end of the first quarter of 2008, Verizon’s penetration rate for video services was approximately 18.7 percent, based on 1,206,000 subscribers in markets where there were 6.5 million homes open for sale, out of the 10.4 million passed.

That’s an increase from the 11 percent penetration rate Verizon had in the same quarter of 2007.

By 2010, Verizon’s goal is for video penetration rates to be in the range of 20 percent to 25 percent of homes where FiOS is available. But that could be conservative. Verizon already has seen penetration rates of more than 40 percent in some of its markets.

At the end of the first quarter Verizon also had some 948,000 satellite video customers as well.

Separately, Verizon penetration of FiOS high-speed data services was nearly 23 percent at the end of the first quarter of 2008, compared with 16 percent at the end of the previous year’s quarter.

Some of the initial markets are in the 30 percent to more than 40 percent penetration range. The 2010 goal is to reach a penetration rate of high-speed data services of 35 percent to 40 percent of homes passed by the FiOS network.

The Fitch analysts think Verizon can do that.

It is too early to determine whether the choice of access architecture has any meaningful impact on adoption rates of new services. But it is hard not to be impressed by what Verizon has been able to achieve. IP

AT&T once stood for “American Telephone & Telegraph,” and we often forget that the first form of network-based communications was the telegraph, and that it essentially was a “digital” communication format.

Voice superseded telegraphic messaging, but IP-based communications and some percentage of mobile communications again is moving digital formats to the fore. With that change, the common and generally correct observation is that, over time, the global communications business model will shift, away from voice, and towards broadband-based revenue models.

As always is the case, though, it is important to remember that a general rule can obscure quite a lot of specific exceptions. One example is the growing role of voice-based communications revenue in lesser-developed regions of the world, and representing about half the total number of mobile users by about 2010, according to ITU estimates.

Nor is there any single demand curve for local telephone calls and usage. Usage has fallen in Europe and some Asian countries, since the late 1990s, while in the United States local telephone traffic has more than quadrupled from 4,000 minutes per capita in 1990 to over 16,000 minutes per capita as early as 2004.

One might surmise that U.S. traffic growth has occurred in part because of the large immigrant population, the low cost of national calling and innovations in mobile call pricing tat encourage usage. The point is that though broadband might be the emerging business model in some regions, voice still will be the driver in others.

Voice will continue to be the core service for dominant operators operating in lower-income regions, in fact. Few expect that to be a realistic possibility in more-advanced markets, though.

And other changes can be noted, most of which suggest that voice is a multitude of products, not a single commodity product, though that is the common presupposition. Certainly there is agreement that the traditional “calling” application is becoming a product sold on a “flat rate” basis.

Higher-quality “wideband” voice, videoconferences, voice in the context of gaming, social or enterprise applications arguably are distinct voice-related products, used in different ways and for different reasons, in different contexts, than many other forms of traditional voice.

Still, business models in advanced nations necessarily will change, driven in part by technological change and in part because of competition. IP-based and mobile services will be sold because they can, and contestants will add new services simply to replace legacy revenues lost to competitors.

There are at least two distinct issues here. Voice might not in the future underpin the wired business model in a central and direct way, but it will remain an application of vital importance on the wireless front. Even when not a direct “product,” voice will remain a large part of the reason people use “access” products, increasingly a “broadband” rather than “narrowband” pipe. IP

Incumbent telephone companies “have been shedding switched access lines at an alarming pace, yet not all the consumers who are rejecting service from a phone company are cutting the cord,” says Monaghan.

Simply, ILEC line losses are an imperfect measure of wireless substitution, he argues. “Many consumers are not getting rid of their home phone but instead are switching to alternate or lower cost residential phone services,” Monaghan argues.

There are other contributors, to be sure. Some second lines have been disconnected as users switched from dial-up Internet access to broadband. And some lines have been abandoned in favor of mobile services. About 15 percent of respondents to a recent Yankee Group survey reported that they no longer have wireline phone service. And that number will grow.

“Over the top” VoIP services might also be seen as a driver of lost landlines. Yankee Group forecasts that the “over the top” VoIP market will hit 6.5 million users by 2011. But PC-based VoIP solutions such as Skype still remain primarily a supplement to a home or mobile phone for international calling purposes, says Monaghan. Very few U.S. consumers use these solutions as a replacement for a home telephone.

It is market shares to cable providers that represents the big driver of ILEC line loss, Monaghan says. Introductory triple play offers that essentially give away, or deeply discount the phone service, have proven attractive.

“We find that switched access telephony in the United States has decreased by 17 million lines from 2005 to 2008 and is expected to continue to lose another 10 million by 2011, but wired voice lines overall have only dropped two percent year-over-year from 2005 to 2008.

“For all intents and purposes, voice has become commoditized,” Monaghan says. Of course, one might draw precisely the opposite conclusions.

Recent data from Harris Interactive suggests that voice communications now are consumed in a wide variety of ways. Some use landline only, others wireless only. Most use mobile and landline. A few use VoIP exclusively. And some use mobile, landlines plus VoIP. Some use mobile and VoIP.

At some point, more voice use will shift to “visual” calls that combine video with voice. So the argument can be made that the proliferation of voice usage modes suggests something other than commoditization.

Rather than commoditizing, voice is proliferating, assuming a unique use mode in a wider variety of contexts. Add voice sessions that are part of gaming or “virtual world” experiences and you get an inkling of even-broader uses for voice communications.

In fact, that is precisely the future now envisioned by providers such as AT&T. In the future, AT&T believes, there won’t be a meaningful difference between mobile and wired voice, between mobile and wired broadband. All of that will simply be access people use to use their applications and services.

In some ways that will make “access” a commodity, in the same way that microprocessors and memory are commodities that power PCs. But that doesn’t mean the business models will be based on “commodities.”

In fact, the ability to use one’s services, anywhere, any time, any place, on any device will require an enormous amount of “non-commodity” effort, probably will be highly personalized and customized, and will be priced like other products that are highly customized. Which is to say: not like a commodity.

Monaghan logically enough argues that ILECs will have to step up their own triple play and quadruple play offerings to create the same sorts of value consumers now seem to find with cable triple play offers. Only in a telco case maybe it is the video that is “merchandised,” rather than voice, as in the cable scenario.

Up to this point telcos seem to have been willing to “merchandise” broadband connections, but over time broadband becomes the foundation service. As cable operators give away voice to preserve the value of their video offerings, so telcos should merchandise video to preserve voice and broadband products.

Nor do telcos have the luxury of delaying fixed-mobile integration efforts, now that leading cable companies have full nationwide access to the Sprint wireless portfolio. Don’t worry about WiMAX. The issue is Sprint 3G services, now available for cable quad-play bundles.

The Harris Interactive survey of 9,132 adults conducted in the fourth quarter of 2007 tends to support the “voice is not a commodity” thesis. The survey shows that about 14 percent of adults are cord-cutters, up from about 10 percent in 2006.

The percentage of adults with landline phones has dropped slightly to 79 percent from 81 percent in the previous survey. So cord cutting behavior hasn’t abated, by any means.

Still, Yankee Group analysts insist the primary issue is market share losses to cable, not wireless substitution. That problem can be ameliorated if enough value is brought back to the equation.

Cord cutters are an issue, but switchers arguably are the bigger problem for ILECs, Monaghan believes.

Others aren’t so sure about that. According to a recent Harris Poll survey, about one in seven adults now reports using only a mobile phone for voice and one in five adults say they have no landline service at all.

And the Harris Poll results are probably less sanguine than the Yankee analysis.

“Use of cell phones is increasing and traditional landline telephone coverage is decreasing,” Harris Poll analysts note.

In fact, Harris argues that 20 percent of adults do not have a landline, though only about 14 percent are completely wireless-only. Some respondents might say a cable VoIP service is not a landline service, for example, which would explain why 20 percent say they do not have a landline, but only 14 percent say they are “wireless only.”

It is troubling enough that wireless-only behavior seems to be stronger the younger the demographic cohort. But the behavior also is increasingly popular among older populations as well.

About half of U.S. adults who only use a cell phone are 30 or over. One-third of 18 to 29 year olds only use a cell phone or the Internet for making phone calls.

About 63 percent of U.S. adults are using multiple approaches to making telephone calls, the poll finds.

Recently, the Centers for Disease Control released the preliminary results from its July to December 2006 National Health Interview Survey. The NHIS finds that 12 percent of U.S. adults use only a cell phone.

So what to make of the results? New technologies often are first adopted by younger segments. So no matter what the statistics might currently show, one has to assume wireless-only behaviors will increase, likely reshaping the entire communications landscape within the next decade, Harris suggests.

That, in fact, seems to be driving AT&T’s insistence on a future where the mode of access does not matter. If that is the case, we must expect very-high degrees of fixed-mobile integration and convergence on the application level.

One logical implication is that people will be able to buy “broadband Internet access” or “voice” as a product that works across fixed and mobile devices. DSL, fiber to the home and mobile broadband might not be discrete products. Neither might “voice communications.”

Instead, people might be able to buy either product as an application and use the application across wired and wireless networks.

Right now, one might make the argument that “switchers” is the bigger trend. But a massive integration of voice and Internet access services across networks might make “cord cutting” a less-relevant phenomenon.

Instead, we’ll see more “dual-play” packages where voice is used on either wired or wireless networks, even if a traditional “landline” voice service is less a relevant notion. The foundation wired communication services then would become broadband—voice capable—and wireless, also voice and broadband capable.

Multi-channel video then would be the other staple. IP

So take note: VARs now must be added to the list of contestants competing to sell telecom and special access services.

“I’ve never seen a time when solution providers had such high interest,” says Craig Schlagbaum, Level 3 VP.

There’s more: 35 percent of VARs say they already refer their customer requests for wide area network connections to an agent or carrier representative.

The most-surprising finding, says Schalagbaum, was that “almost half of the VARs already are selling services. That surprised us.”

Only 11 percent of the VARs surveyed reported having “no interest” in selling carrier services.

About half the time, referring opportunities went direct to a carrier, says Schlagbaum. About half of leads were referred to a telecom agent. So think about that: a good percentage of “telecom agent” channel sales actually are driven by VARs, in addition to the sales VARs make directly.

In a separate follow-up round of interviews, CMP found that 20 percent sold access and wide area service directly, half referred those opportunities and 30 percent let customers source themselves.

From Level 3’s perspective, the volume of activity is matched only by the volume of local partners. “There are perhaps 8,000 telecom agents, but possibly 200,000 VAR type consultants and integrators,” says Schlagbaum.

And there’s obviously more. It is not a simple matter of more “feet on the street,” as important as that is. As IP communications becomes ever more prevalent, the technology quotient of virtually every solution goes up.

IP communications only work properly when the local networks have been characterized and re-engineered, if necessary, to maintain adequate bandwidth, latency, jitter and other technical parameters.

That means a more-prominent and essential role for network specialists, and a reduced role for mere marketing and sales entities.

“There are 192,000 channel partners we aren’t talking to,” says Schlagbaum. Still, “perhaps 20 percent of telecom agents now are solution providers in some way.”

To be sure, the direction is clear enough. “With telepresence and data connectivity growing, VARs play a huge role,” says Schlagbaum. “When a telecom agent is involved in a potential deal, the deal often is driven by the VAR, as a referral.”

Solutions simply are more entangled with data services these days. “Customers are wanting VAR partners to recommend the connectivity piece and provide a complete solution,” Schlagbaum says.

The solutions business customers now require—and which require carrier services—include security (81 percent), WAN migration (66 percent), storage (64 percent), as well as data center and disaster recovery, he notes.

Why are solution providers involved in carrier services? There are lots of reasons. About 40 percent sell services because customer loyalty is enhanced. VARs also can drive more sales, add more revenue and margin.

They also gain greater account control. And there are growing competitive positioning reasons as well. “Carriers can sell Cisco hardware, so VARs need to compete on that level as well,” Schlagbaum says. Still, customer loyalty and sales volume are key.

The “total top-line deal value can increase between 50 and 100 percent when you add carrier services,” Schlagbaum notes.

And given declining margins for simple hardware sales, there’s growing interest in higher value services, especially of the recurring sort. In 54 percent of cases, solution providers had 10 percent margin on sold services. But margins for more-complex services ranged up to 20 to 30 percent in other cases.

And solution providers are encouraged to sell carrier services by their hardware partners as well. “The trend is that a lot of the hardware vendors are encouraging carrier services since the VAR will be more profitable,” adds Bill Steen, Level 3 marketing director.

“Solution providers only get eight points of margin on sales of routers and boxes, so everybody is getting squeezed on margin,” says Steen.

In many cases the “sell” is the same as has been common in the enterprise space for years: redundant connections. So a solution provider doesn’t necessarily even have to displace a current provider.

“Lots of enterprises see exploding bandwidth and can’t have all traffic running over ILEC pipes and need diverse providers and routes,” says Steen.

“Enterprises are asking for diverse routes and VARs can supply that,” he adds.

What’s the hesitancy, for the few providers who really don’t want to be bothered? “There’s just enough contract and acronymn stuff to learn that some don’t want to deal with it,” Steen says.

“Some also don’t want to get a call at 2 a.m. that the network is down,” he adds. “But it is easy to handle that sort of thing on our network.” Still, there are ways around that.

“In Denver, a partner we have works as a system integrator’s telecom desk,” says Steen. “You can outsource it, basically.”

“The most successful or best partners seem to be those who are selling software or storage as a service,” says Schlagbaum. “It fits really well.”

Apps sold on a pipe have important margin implications as well. Most carriers provide agents at least 10 to 15 percent margin on a recurring basis. But “you can get higher margins if you add applications; as much as 50 to 70 percent then,” says Schlagbaum.

And the precedent would seem to be clear enough. “Maybe 20 to 30 percent of total carrier business comes from telecom indirect channel,” Schlagbaum says. “For Cisco, as much as 75 to 95 percent comes from the channel.”

The implications are clear: the telecom world hasn’t caught up. Up to this point there might not have been a reason to rely more heavily on solution providers.

But that was more characteristic of a world where services could terminate cleanly at a wiring closet, to a router or some other boundary device. These days, services have to terminate on end user devices.

And that seems to signal a move, over time, to a greater role for solution providers in carrier sales and
provisioning. IP

There are several ways to look at prospects for wireless backhaul services and equipment mobile carriers use to support their operations. The first is that the 80 percent of existing towers that are fed only by T1s simply will have to upgrade to broadband, and fiber builds will be prohibitive, so wireless is the logical choice. That’s certainly the view Clearwire takes, for example.

Another view is that it still will be too expensive to install new fiber to most tower sites, even if the need for broadband is there, as a typical tower only represents about four T1s worth of bandwidth per site, supporting 1.8 carriers per tower, or about $1400 a month in recurring revenue for access providers, altogether.

The implications might be jarring: on average, a carrier only has a single T1 in each direction, at each site.

That drives the argument for Ethernet over copper access.

Of course, this will change as third generation network traffic builds, and fourth-generation networks are deployed. Also, some predict there will be an average of three carriers per tower by about 2011. That drives the argument for installing new fiber.

So a case can be made for broadband wireless backhaul or Ethernet over copper or optical fiber, depending on the location, tenant density on a tower and amount of broadband traffic supported by each tower, when using the standard star architecture.

Optical fiber then will make most sense in dense urban areas, Ethernet over copper in mid-density areas and wireless in rural and less-dense areas.

But different architectures could change the financial equation. Mesh networks, for example, would tend to favor wireless.

And then there’s the issue of whether carriers want to lease capacity or buy wireless transmission gear.

If James Taiclet, American Tower Corp. CEO, is correct, there’s still not as much demand for wireless backhaul in the U.S. mobile carrier market as one might think, as common as that practice is elsewhere in the world. Of course American Tower doesn’t go out of its way to provide backhaul services; it mostly leases real estate.

“There is some incremental additional demand for microwave dishes for backhaul from a couple of carriers in the United States,” he says. “That could be for a combination of redundancy purposes and/or adding capacity and not necessarily paying for T1s to do so.”

“It’s been modest” for American Tower, though obviously key for Fibertower or other providers of wireless backhaul services.

As recently as 2006, 80 percent of mobile tower connections used copper media while 15 percent used wireless. By 2010, copper should be down to about 70 percent and wireless up to about 20 percent, with optical fiber connections accounting for 10 percent, he argues. IP

U.S. Internet users viewed 11.5 billion online videos during March, 2008, representing a 13 percent gain sequentially since February 2008 and a 64 percent gain year over year from March 2007, according to comScore.

Telecom Regulation

The FCC began to impose some regulatory requirements on VoIP a few years ago. However, it limited its new obligations to “interconnected VoIP” and found that a voice peering service known as Free World Dial-up was not subject even to the new interconnected VoIP rules. For regulatory purposes, the FCC defined “interconnected VoIP” as having four elements: (1) it enables real-time two-way voice service; (2) it requires a broadband connection; (3) it requires IP compatible customer premises equipment; and (4) it permits the user to send and receive calls to the public switched telephone network. When these four elements are present, the FCC determined that the “interconnected VoIP” service is a substitute for traditional telephone service and should have certain regulatory requirements associated with telephone service.

Free World Dial-up was found not to be “interconnected” because it was pure peering which did not connect to the public telephone network and thus was not within the new classification. Since most voice peering services similarly meet the first three “interconnected VoIP” elements, whether they allow communication with the public network currently is the touchstone of whether a voice peering service is subject to the FCC’s interconnected VoIP rules or is completely unregulated. As technology continues to evolve, however, even this line could move.

The Federal Telecommunications Act defines “telecommunications” and “information” services separately. The definitions are verbose, but basically “telecommunications” is traditional telephone or transmission service without enhancements, while “information” services incorporate into their operation computer-based end user features. The most common of these features are store-and-forward capability or “net protocol conversion.” VoIP providers maintain that VoIP is an “information service” because calls originate in IP format and terminate on the public network in TDM format, thus incorporating net protocol conversion into the service. (There are other aspects of VoIP which also are said to support information service classification.) Every service which involves telecom transmission is either telecommunications or information, and each service is either classified as one or the other. It cannot be both.

The difference in regulatory treatment of the two classifications is dramatic. Telecommunications services are regulated by the Telecom Act and the FCC rules as traditional telephone services, while information services are not subject to those requirements. However, the FCC possesses “ancillary” jurisdiction over information services which allows it to impose obligations on information service providers if it deems it necessary.

The FCC has steadfastly avoided ruling on the classification of interconnected VoIP as either information or telecommunications, despite the fact that the question has been posed to it on many occasions. Instead, it has said only that interconnected VoIP should be treated for the time being under its ancillary jurisdiction and subjected only to specific requirements. Over the past three years, however, the list of those requirements has grown. It now includes payments into the universal service fund and compliance with 911 requirements, CALEA (law enforcement) and CPNI (customer privacy) rules, among other things. An FCC ruling that interconnected VoIP is a telecommunications service would extend the remainder of traditional telephone obligations to those services, possibly including state PUC regulation and payment of telephone company access charges.

It is important to remember that where state PUC regulation is concerned, “information services” are deemed inherently interstate and are immune from PUC regulation. However, this was not the basis for the FCC’s ruling that nomadic interconnected VoIP services are inherently interstate. Instead, the nomadic services were said to be interstate because their ability to move from one location to another while using the same telephone number makes it impossible to know whether any particular communications is interstate or intrastate. Thus, federal preemption prevails and the states are ousted from jurisdiction on the basis of the nature of the transmissions, not on the basis of classification as an information service. This preclusion of state regulation has already started to erode, however, in the case of “fixed” interconnected VoIP services. Some states are now starting to impose regulations on those interconnected VoIP services.

So what does all this mean to voice peering? If there is no current or planned connection to the telephone network of any kind, probably it means nothing. Pure peering services are likely to stay “information” services that are immune from FCC regulation and from PUC oversight – at least for the foreseeable future. On the other hand, many voice peering services now do incorporate some form of interconnection to the public telephone network. Those offerings depend upon staying outside one or more of the elements of “interconnected VoIP” to avoid the FCC’s regulations. And the key in that regard is sending and receiving calls to the public network. Most voice peering does not assign a telephone number to users and thus does not permit receipt of voice calls from the public telephone network. It is this thread which often stands between a voice peering service and classification as “interconnected VoIP.” Skype, for example, provides both Skype “in” and Skype “out” as separate offerings, so that neither one permits users to send and receive calls.

Not to be apocalyptic, but voice peering providers should take away two things from this discussion. First, the FCC could easily change the definition of interconnected VoIP to send or receive calls from the public network, thus sweeping in many services currently excluded because they only allow origination of calls. This could subject all those services to the universal service, 911, CALEA and other obligations which they now avoid. Second, the FCC still could rule that interconnected VoIP is a telecommunications service, expanding the scope of regulation of interconnected VoIP to include all traditional telephone requirements. While neither of these developments is certain, neither are they wildly unlikely. Any entity involved in voice peering should closely follow the FCC rulings on these issues and have a plan to deal with any possible developments.

Privacy Regulation

Totally apart from telecommunications regulation, the FTC has become increasingly active in protection of consumer privacy. While interconnected VoIP providers must comply with the FCC’s customer proprietary network information (CPNI) privacy rules, the FTC actions go much further and apply to nearly every business that sells services using a post-paid account or a credit-card-on-file. To the extent voice peering companies use either method to bill their customers, they should be aware of the need to comply with new FTC “red flag” requirements to prevent identity theft which become effective on Nov. 1, 2008.

Space does not permit an extended review of the FTC rules here, but they apply to “creditors” who maintain ongoing accounts with customers for repeated transactions. Cell phone accounts are offered by the rules as one example of a “covered” account which is subject to the rules. If a business maintains such “covered accounts” it must comply with the new rules to prevent identity theft of its account holders. A compliance plan must have four basic elements: identification of certain “red flags” that indicate possible identity theft activity, a way to detect when that activity might be occurring, a plan to respond to the detection of such activity, and regular updating to those plans. A company must devise a compliance plan by Nov. 1 and that plan must include approval by the Board of Directors or a committee of the Board, a means to oversee and implement the program, some method of training employees about it, and oversight of the execution of the plan.

The FTC is empowered to investigate compliance with these requirements and can impose injunctive relief on violators, as well as fines up to $11,000 per violation (each day of non-compliance can be a separate violation). While not under the “red flag” rules, the FTC recently showed its seriousness in privacy protection by bringing an action against a firm for “pretexting” to obtain and sell telephone customer information. A firm called Action Research Group, and an affiliate known as Eye in the Sky Investigations, obtained telephone records and related information about individuals and then sold that information. The case was settled by entry of a permanent injunction imposing a permanent halt to the companies’ operations and judgments totaling about $600,000. When the new “red flag” rules take effect on November 1, the FTC can be expected to initiate some investigations for compliance to demonstrate its intent to enforce the rules aggressively. Companies that maintain “covered accounts” should take heed. IP

That is not stopping a huge effort by cable operators to develop highly-targeted advertising services tied to video-on-demand and multi-screen services. Heretofore limited to “local advertising,” cable operators now see a huge opportunity to lead in the targeted advertising space, which might allow them to attract “national” advertisers in a way they have not been able to do so far.

That, of course, will not be the case for content rights holders, who typically make all their money from license payments, distributors who make money primarily from fees, or content networks, who make money from subscription fees and advertising.

But network access and service providers will continue to make most of their money from subscription or on-demand-based fees from subscribers, with one possible exception. It is entirely conceivable that partner payments, in the form of targeting information, database and quality of service revenue streams will exist where they do not today.

The best example is content delivery network services such as provided by Akamai. It is feasible, perhaps necessary, that access providers become inserted into the content delivery value chain, if only because quality of experience will require control down to the actual end user device.

One of the best current examples is the places cable TV operators make their money. Cable operators have been in the advertising revenue business for decades. Yet look at where the revenue is, and the volume of that revenue.

Already, newer subscription-based products including high-speed data and voice outstrip advertising revenues. And the trajectory seems pretty clear. The next market segment cable will chase is business voice and data. The only question is how long before that business eclipses advertising.

The reason advertising seems to have such mind share is that it is crucial for other partners in the value chain, such as Google and other search providers, media companies and portals.

That doesn’t mean it is anything but rational for the likes of Google to develop the mobile Web. That simply reinforces the business it already has, while creating new advertising segments it can address.

That doesn’t mean service providers in general, or even the very-largest cable and telecom companies, will have much direct revenue upside from mobile advertising.

Many rightly point to mobile advertising as a significant revenue contributor, and that will be true for content providers and portals, at the very least. It remains to be seen whether mobile service providers will be able to conjure up targeted platforms that provide the same sort of upside that cable operators hope to create.

U.S. advertising spending on mobile media will total more than $700 million by 2012, up from nearly $88 million in 2008, according to Screen Digest, for example. That’s nice, but not nearly so attractive as messaging, broadband access and email services will contribute.

Although the promise of millions of iPhones and other devices to deliver a mass mobile media audience is great, it remains more promise than mainstream reality.

Only 15 percent of responding ad executives in the Screen Digest study said that they had used mobile advertising as a venue.

Similarly, more than six out of 10 responding agency executives in a December 2007 study by iMedia said they would not put a large portion of their 2008 online budgets into mobile. None of that should be worrisome.

The percentage of targeted ad revenues now earned by the cable industry is virtually zero. It is not surprising that at such an early stage of development mobile service provider revenue also is virtually zero.

“There remain clear growing pains ahead for mobile advertising,” says John du Pre Gauntt, senior analyst at eMarketer. “There are sticky disagreements concerning mobile customer information among mobile operators, Web portals, brands and agencies.”

“All agree that better contextual targeting (for example, location, time, history) is a prerequisite for mobile advertising to succeed,” he adds. “But how to get there in the short-term remains an open question.”

That’s precisely the sort of challenge cable operators now are trying to address with Project Canoe. Comcast, Time Warner Cable, Cablevision, Cox Communications, Charter Communications and Bright House Networks have committed $150 million to try and create an “easy-to-buy” framework for targeted advertising.

Getting the right advertisement to the right person, based on that individual’s own tastes and lifestyle, has been the promise of cable television for years and the reality of the Internet. In that sense, cable is simply playing catch up.

In fact, what conceivably could happen is that cable simply protects the share of local advertising it already gets, rather than creating a massive new revenue stream. And in truth, that would still be worth doing, though company executives clearly believe they can catapult cable into a new orbit by offering such targeted capabilities.

But the cable industry has promised to do such things for years, and largely hasn’t succeeded, at least so far.

In many ways, the adversary here is Google and other providers offering over-the-top video. If they are able to shift significant viewing away from the linear mode, advertising should follow. And since Internet-based advertising inherently allows much more precise measurement, cable operators need to create some similar capability to compete.

Collectively, U.S. cable operators generate about $5 billion in revenue from selling local ads. TV advertising overall is a $70 billion business and most of that goes to the programming networks.

So Project Canoe envisions vaulting cable into some new status as a national ad vehicle with highly-targeted buying capabilities.

For each hour of programming on a cable network, the cable operator owns about two minutes worth of inventory, where the programming network has 15 minutes to sell.

Interactive or on-demand viewing is a different animal though. Since such programming in a cable walled garden requires access to the set-top box, Project Canoe is seen as a way to attack more of the national ad budget by giving national advertisers highly-specific information about viewers.

The executives involved in Project Canoe think that, by working together, they can increase the cable industry’s take from $5 billion a year to $15 billion a year.

Be that as it may, cable operators still will make much more money from selling voice and high-speed Internet connections. Perhaps they will make more money from advertising than from commercial services sold to business customers, but some of us would not be surprised if even commercial services wind up generating more gross revenue than advertising does.

Perhaps that appears unorthodox, but even industry forecasts suggest that even in 2017, cable operators will make more money from cable modem and voice services than from all advertising
put together.

The same sort of perspective holds for major telephone companies. Advertising is a new opportunity. But the magnitude of the gains will pale in comparison to what carriers can earn by providing communications and other IP-based services.

Cable and telco providers cannot take their eyes off that ball. IP

In retrospect, it seems obvious that these offerings were destined for greatness. When these offerings were launched, however, they were each met with skepticism: the existing market is crowded and defined and you need more features and a lower price point to be successful. The prevailing wisdom was: you will never sell a subscription for video recording when it is bundled into a VCR; you will never sell videos by mail when you can run over to the latest Blockbuster and rent most of the hits; and you will never sell a video camcorder with almost no features.

Wrong. Each gained significant share of its category by outperforming in ease-of-use and simplicity instead of piling on more features (e.g., iPod, 87% share). Fortunately for us, the visionaries behind these offerings ignored the conventional wisdom and drove ahead, creating the cult followings that they have today. What lessons can we take from these examples and apply them to the telecom market in 2008?

The telecom providers today mistakenly pursue a strategy of delivering more and more features (even if customers can’t use 95% of the existing ones). They hope that one new feature will turn out to be the ever-elusive “killer app”. Secondly, the telecom industry clings to the notion that customers always prefer the lower-priced good (even if it is less convenient, and offers no support) over the premium-priced product that stands apart.

In nearly nine years at BroadSoft, I commonly fielded the question about the next “killer app” in telecom. My answer was that a relentless focus on redefining and simplifying the user experience could revolutionize the industry. For example, most people use a telephone to make basic calls but little else. A better user interface (like a web browser) would make common, but little-used functions such as call transfer, conference calling, etc. more widely used.

Another example is the hosted PBX service. Service providers get excited to explain all of the neat features they can push on small business owners (“You can get shared call appearance!”) But the real value for small business owners is outsourcing: managing the installation, operations, and upgrades, allowing businesses to focus on their core operations. Many service providers struggle with the idea that they must be cheaper than an IP PBX alternative when, in fact, the leading hosted PBX service providers sell at a premium price.

A close analogy is TiVo to the VCR. TiVo did not invent the idea of recording a TV show (it had been around for over 30 years) but made the experience so easy, anyone with a remote control could do it. They even charged a premium for the ability to do so, both with a dedicated hardware box the consumer would buy as well as a monthly subscription service. Skeptics scoffed at the idea, while consumers embraced it and made TiVo a new verb synonymous with recording a TV show. No more blinking 12:00 on the VCR – just program-and-forget American Idol until you want to watch it.

Part of the reason the telecom industry is in a funk is its stubborn insistence that features are what is missing vs. making a better user experience. The carriers continue to sell the laundry list of features and wonder why end users are confused and don’t adopt their latest offers. In stark contrast, the enterprise telephony vendors (notably Cisco and Microsoft) selling the same idea to the same business customers, are having a huge success by selling “unified communications” which is less about creating new features so much as taking the innovation of the past 30 years and tying it together so that the average business worker can make all this complicated technology work for them.

Similarly, the belief that price always trumps other attributes holds the telecom industry back. Engineering-minded executives hold disbelief that any right-minded consumer would pay more for simplified features that offer convenience. Ironically, these executives espouse this view while holding their iPhones, talking about the NetFlix movie watched last night, and stashing an iPod in their pocket.

Most industry research shows that price matters to a small percentage of people in each market (usually an average of 10%) while most people chose brand, quality, ease of use, customer service, and convenience as more important reasons to buy. There is a reason why people still go to the movies vs. renting at home; why people go to Starbucks vs. brewing their latte from scratch; why people pay for business class over coach: it’s just a better experience even if you have to pay a few more bucks for the privilege.

If telecom execs want to end the malaise afflicting our industry with endless price cuts and increased competition, it’s time to embrace the value that ease of use and convenience can bring to the end user – even if the feature in question has been around 20 years or more.

Whether re-envisioning how the phone works, thinking how non-integrated services should work together, or even how video calling can finally be adopted by the mainstream, it’s time to stop adding features and start reinventing what we already have. IP

Scott Wharton is the founder and CEO of Vidtel. He can be reached at
scott@vidtel.com.

There are a few major flavors of video over the Internet and the each poses its own style of problem.

Live - This is also known as streaming. Live video is almost always news, sports and/or other events. Everything else (movies, sitcoms, reruns) isn’t live or time-sensitive when it comes to delivery. Broadcasting schedules for major networks traditionally have been made based on the time of day (e.g. soap operas in the afternoon and cartoons on Saturday morning). This is all changing and going away with the advent of On-Demand video where shows can be watched any time of day that is convenient for the viewer. The exception of course is live broadcasts that the viewers wish to see as and when they happen.

Live video in the IP domain is particularly challenging as it is very intolerant of packet loss. That has a double negative as advertisers and therefore their broadcaster vendors demand the highest quality, lowest latency IP connections. This is where the public Internet struggles. Since it is a shared medium there is no way of predictably telling what service level one will get across it from end to end.

Peer to Peer - Made infamous by BitTorrent, KaaZa and others, this is the mother of all spontaneous, dynamic and uncontrollable (legally) Internet packet-jammers. Moving video files directly from machine to machine over the Internet is a very effective function, but those guys stuck in the middle don’t appreciate it as much as the folks sharing files. In an effort to un-stick themselves several ISPs made an attempt to make all file sharing illegal based on the presumption that all of the files are violating copyrights – something they could have no knowledge of. Some have even gone so far as to discriminately block certain packets that they alone determined to be unfit for routing. There are several totally legal and very useful P2P business applications that cannot be discerned from the rest, so these attempts have failed.

Just like off-shore tax shelters, P2P video wouldn’t be so bad if only a few people were doing it, but now that it has become public knowledge and masses of people have figured it out it is being demonized. If you ask ISPs they will tell you it is for good reason too: Who is going to pay for their necessary network upgrades to support this video? Most people would believe that is the ISP’s responsibility. After all, they are running a business, aren’t they? Ah, maybe supply and demand with a dash of pricing is having a little jitter of its own.

Uploads - We can all thank YouTube for being the shining star in this category. Remember, a video file is just like any other file, but it’s a really big file. If you have the broadband access pipe at home you can send anything you want upstream to the big cloud (for now) and send it across your ISP’s network to YouTube’s ISP(s) and then drop it down on its servers. Voila! You have uploaded video. Again the law of large numbers comes in to play and those would be large files and increasing numbers of people performing this act. Do the math. The videos of ”God only knows what” getting sent up every day causes massive congestion in the Internet arteries. Imagine drinking a gallon of Crisco and eating 3 dozen doughnuts every day. How long would it be before you seized up? Another consideration would be your reliability to perform other functions or tasks. Would it be wise for someone else to rely on you being around for the long term to do heavy lifting work?

Downloads - The opposite of upload and just as deadly. YouTube ranks first in this category, but it is quickly being challenged for Top Clogger honors by the BBC. The BBC has recently officially (Dec. 07) launched iPlayer which is a free, time-shifted, web-based video download service. Sort of like a huge TiVo on the web where anyone in the UK can download and watch BBC programs as and when they wish. They have signed up 42 million people in just a few months and estimate that the application is now consuming 3% to 5% of the local ISP’s capacity. Ouch! If one application can do that I guess they wouldn’t want 19 others like it or there would be nothing left for anyone else! No room for VoIP, eBay, CNN, Amazon, etc.

Therein lays the problem and major issue with the Internet and ISPs. The Internet and its collection of providers are not prepared in a network sense. They’re not prepared financially either. The affected ISP’s are actually demanding that the BBC pay them £831million for the necessary network upgrades. To that the BBC says “…we’ll inform customers which networks to avoid”. Wow, now that’s quite a picture.

It is humorous in a sad way to see how this all unfolds. Napster is the perfect example of pin the tail on the bad guy in the P2P world. Since it could be singled out it could be blamed and killed. KaaZa has a different architecture (so does Skype of course) and so there is no company per se that can be shut down. In the download business YouTube could have been singled out and traffic shaped, but Google bought them. Google owns its own network and has rock solid peering agreements, so now that traffic is blended right in - touché. The BBC is now the latest donkey that the ISPs are trying to pin their bum wrap on. It is quite possible that the BBC is guilty of negligence in that it should know better than to rely on a doughnut gorging sloth to do real heavy, serious business. Outside of that, though, it is just like every other content provider. It believes that the Internet is there and that it can use it to serve up what its viewers/customers want. Just like air and water, they will always be there, right? Ah, you wanted CLEAN air. Go and ask the people in Atlanta, Ga., about water and proper planning. They can teach a good lesson about what not to rely on.

The bottom line is, as always, the bottom line. There is just not enough of a financial return for most ISPs to make the necessary investment at this point to support video apps like the iPlayer. Interestingly, the folks that do have the money, Verizon, have made the investment (FiOS) to carry video to he home because it has “protection” from the government (Broadband Relief), so it doesn’t have to share its fiber with any competitors. So it would seem that when the next iPlayer is launched (probably NBC in the US) the only ISP that won’t be crying about it will be Verizon. Stay tuned. IP

Hunter Newby can be reached at
hunternewby@gmail.com