Archive for January, 2000

Mobile Unbundling

Saturday, January 1st, 2000

Virtual Mobile Network Operators

Why should there be different regulatory regimes for calls made over the fixed network and calls made over the mobile network? On the telephone network SPs can pick up calls from their customers and route them in whatever way they want. This resulted in up to 80% cost savings on many of the international routes. Competition, stimulated by this innovative routing system, has over time brought the overall cost of international calls down by 40%-60%.

In December 1999 the Productivity Commission confirmed the concerns that had been expressing over the previous two years. The ‘cosy triopoly’ had been able to limit price reductions to just 1% between February 1998 and June 1999, while most comparable countries had seen prices slashed along the lines outlined above. By 2000 however, competition had finally made an end of this situation. Telstra announced a range of CDMA initiatives and Optus launched new initiatives that led to the introduction of several Virtual Mobile Network Operator (VMNOs) on its network. However, real progress can only be made once the industry accept different business models aimed at stimulating a wide variety of VMNOs that are able to address the needs of niche markets.

The One.Tel unbundling proposal of 1998

In early 1998, the now defunct mobile SP, One.Tel, led the push for the VMNO model. The industry proposed to the Telecommunications Access Forum (TAF) that long-distance GSM services should be unbundled. This would have allowed the company to set up a true virtual mobile company. In regulatory terms this would mean a declaration of the long-distance mobile originating service. However, nearly two years later in August 1999 the ACCC announced it would not declare the service, leaving the cosy mobile triopoly intact. In the fixed network, competitors can select their own supplier to whom their traffic is routed. In the mobile network the three operators have kept their total end-to-end control over the call.

One.Tel, supported by AAPT and others, proposed to make unbundling possible by asking the TAF to make the so-called ‘routing option service’ a declared service for switched SPs (Virtual Mobile Operators – VMOs). This would allow them to carry the long-distance and international components of mobile calls over the transmission facilities of their own network. Under the current regime, when a person makes a call on a mobile the incumbent carrier takes the full revenue of the whole call, irrespective of whether it contains transmission elements carried through the SP’s network. Often such calls can be delivered far more effectively and inexpensively through what is known as ‘Optimal Routing’.

The proposal was to unbundle the service, whereby the GSM operator carries only the local call component (that is, mobile to base station/switch) and then the remaining portion of the call should be contestable in a similar manner to fixed wire.

Exhibit 1 – Effects of unbundling

A mobile call to London for instance is about $1.50 per minute; by using an override code, One.Tel estimates at that time (1999) that they could reduce this to approximately $0.70 per minute and still enjoy a substantial margin. The same process could be used to undercut Telstra’s and Optus’s domestic long-distance mobile tariffs. If this occurs, not only would the three carriers lose traffic, they would also lose a very profitable bundled segment.

Once unbundling is in place, the next campaign would be for the right to program or own the SIM card so that the mobile phone can be pre-programmed to dial the override code. This could, of course, be carrier-independent.

So far carriers have successfully stopped VMOs from getting off the ground. By 2002 it was estimated that over 50% of the profits from mobile operators came from these highly profitable termination charges. Regulators in Europe are investigating this practice, but so far no action has been taken.

While the unbundling issue has, for the time being, disappeared from the radar, there is no doubt that with an increase of competition the option of VMOs will be revisited as it will become one of the drivers behind the marketing of mobile services.

In the meantime One.Tel got frustrated with this inaction and started to build its own ill-fated network, however buy doing so it started to seed the problems that eventually led to its downfall. It is not possible to be both a VMNO and a network owner at the same time. Both concepts require opposite business models, this is very hard to reconcile within one company.

For more on VMNOs see separate report: Australia – Mobile Communications – Industry Trends and Analysis. For Roaming, Preselection, Interconnect and MNP see separate report: Australia – Mobile – Termination, Roaming, Fixed-to-Mobile Charges. For more details on numbering issues see separate report: Australia – Regulatory Environment – Numbering Issues.

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Saturday, January 1st, 2000

Over the last few months we have viewed with scepticism the developments in the mobile data market. New services such as WAP are nothing new. Pagers, SMS and dedicated mobile data services have been around in some cases for several decades. All the ‘fantastic’ Internet services that are now available on WAP, such as news, weather, stocks, sport results, restaurant tips etc, have been around for many years at a fraction of what they will cost on these beautiful WAP phones.

None of those services have ever taken off on a large scale, so why should they now – particularly when the latest services cost ten times more? The key reason why WAP, GPRS and 3G are going to fail under the current proposals is that the business model supporting them is flawed. First of all, why on earth would anybody bother to access the Internet from a mobile phone when it can be done far more conveniently and cheaply from a PC (and soon from their TV)? Secondly, the mobile charges for voice are already too high, let alone for data services.

I think the potential for wireless Internet and data services is, on the one hand, as a support service to voice and, on the other, as dedicated tools/toys for certain programming (games, music). Mobile phones as Internet devices will only be successful if the majority of the services provided over the handset are free. They need to be either embedded in the service and/or paid for by the provider of the service in two ways – an advertising model or a services model – you pay for a particular service but the mobile charges are not charged separately.

Having said that, here are some mobile data predictions from the investment group Durlacher —

Mobile operators will increasingly derive revenues from Internet content and services and become leading Internet portals in future. Durlacher predicts that the European m-commerce market is expected to grow from Euro 323 million in 1998 to a massive Euro 23 billion by 2003. They also reveal that the United States is two years behind Europe in developmental terms. Due to the specific area of mobile communications Europe has adopted a clear lead in terms of usage and application development.

Europe has a high penetration of mobile phones and has successfully adopted GSM (Global System for Mobile) as the single standard. The USA has not been able to reach this single standard, nor has it managed to settle on a generic type of terminal, thereby retarding the arrival of a critical mass of handsets in the open market for the introduction of new services.

Durlacher advocates that mobile operators are ideally positioned to lead the m-commerce market. They possess comprehensive customer data including demographics, calling patterns and a detailed customer profile, as well as an existing billing relationship. Durlacher’s report examines how, in the near future, the operator will own information about the subscriber’s geographic position. This will facilitate the offering of location-based services such as advertising to a handset, shopping on the move, making reservations in hotels and restaurants, as well as the receiving of localised information.

In the near future Durlacher believes that mobile operators will have to undergo a major change in order to position themselves as mobile portal providers and content aggregators for WASPs (Wireless Application Service Providers). Taking into account the different business models used for serving the mass market demand for mobile phones and for building a mobile portal, a probable split-up of network operators into mobile voice and mobile portal is likely.

Other key findings of the report are:

– The main mobile application by 2003 will be mobile advertising at 23%. The benefits of mobile marketing capabilities are obvious with the potential for the direct marketing industry to exploit the one-to-one functionality of the technology. Mobile financial services, eg stockbroking, banking and payment services (21%), as well as personalised, often location-based mobile shopping services (15%) will also contribute significantly to market development. Entertainment will only become a major driver for commerce after 2003 with the implementation of UMTS (Universal Mobile Telephone System) technology.

– Based on the powerful capabilities of the mobile phone and the unique customer relationship that exists between mobile operators and their customers , Durlacher Research expects that the first mobile operators will move decisively into the banking sector in 2001, by acquiring either banks or banking licences. Mobile phones incorporate ideal features for ensuring electronic payment and Durlacher’s report predicts that it will, in effect, become the ‘electronic wallet’ in Europe.

– The initial killer application for mobile Internet services will be e-mail, based on the current success of SMS (Short Message Service), which is necessary to pave the way for more transactional m-commerce services. Instant messaging from the mobile phone will start to substitute e-mail as GPRS (General Packet Radio Services) arrives. Unified messaging will become mainstream technology by 2001.

– Smartphones will become the standard mobile device from 2002 onwards. These devices will include a WAP microbrowser, which enables wireless Internet access. The other main category of device will be so-called communicators (where Nokia has led the way). These have been developed from PDAs (Personal Digital Assistants) and are equipped with, or linked to, a mobile phone. The distinction between mobile phones, PDAs and consumer electronic devices will begin to blur after 2001 and phones with an integrated MP-3 player or video player will begin to appear on the market at this time.

According to the report, the time for focussing on voice services for mobile operators is over. Mobile operators must quickly build Internet portals. Those network operators who are too slow to build a major portal, will need to buy one.

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Saturday, January 1st, 2000

The collapse of this partnership didn’t come as a big surprise.

The company has failed to live up to its potential of becoming a leading outsourcing and project management company in the industry. From the very first moment the partnership has been troubled by management quarrels about its direction and its strategy. Telstra wanted to use it to protect its business while Lend Lease and IBM were looking for new business opportunities.

Lots of potential projects bogged down due to indecisiveness and IBM and Lend Lease lost their interest in Advantra some time ago. For a while it looked like it would slowly fade away; however in a change of heart Telstra has suddenly realised that it can use its gigantic engineering company to move into the project business.

I totally agree with this. However I doubt that Telstra will be able to turn Advantra around and start tapping into the opportunities that have existed ever since they formed the partnership back in 1997.

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Saturday, January 1st, 2000

In this editorial I would like to focus on some of the crucial regulatory issues that need to be resolved within the next few months. They are concentrated in two areas:

– Industry Regulations

– USOs

Industry Regulations

We have now entered the third year of deregulation. The new Act, which was developed in 1996, came into effect on 1 July 1997. At that point we made the following observations:

– The new Act relies on self-regulation, and it will depend on Telstra’s willingness to tolerate competition (there was at that time absolutely no indication that this would happen).

– The new Regulators will need time to get on top of all the issues. This could easily take a year.

– The new Act totally ignores convergence, which will be the key issue in the future.

When we did our first year review in July 1998, we highlighted that:

– Telstra had been extremely successful in delaying competition.

– The Regulators at that stage still had to make an impact.

– The Internet was now the key issue, not voice calls.

In December 1998 a range of regulatory initiatives were launched in the market and the industry began to hope that maybe competition under the new regime would work after all. Dozens of submissions were made by the industry over the 1998/1999 holiday period and the Regulators came back with their first reports on Interconnect, Local Access, Number Portability and Local Loop Competition.

By mid-1999, however, these high hopes were fading. Telstra fought against competition every inch of the way. Its army of lawyers, one of the largest in the country, was extremely successful because the government insisted the industry should rely on self-regulation

The situation worsened and in June 1999 the Minister stepped in and conferred extra powers on the ACCC to block Telstra’s delaying tactics.

However, up till now (early 2000) this has had little or no effect. Telstra is now involved in 32 arbitration cases, persisting with its successful delaying tactics, and we still don’t have a good interconnect and access policy; no number portability beyond some early initiatives; no mobile roaming and no competition in the local loop.

While I would place the blame for this squarely in the government’s province – it being the majority owner of Telstra and the ultimate ‘boss’ of the Regulators – criticism can also be levelled at some of the other players in the market.

Over the last decade I have often argued that the new telcos are on the wrong track, concentrating far too much on the traditional telephone services and basically copying the Telstra model in their own market approach. There is little or no marketing done and their level of customer service is not all that much better than the notorious Telstra service. While they had to spend a lot of time on the regulatory stuff, preparing submissions etc, they also tended to follow a traditional confrontational telecommunications model. Furthermore, sometimes they appear to be exhibiting attitudes very similar to those of Telstra. Some of the industry codes are bogged down in indecisiveness, while the rest of the world marches on – no, sorry, races past them.

The era of lengthy negotiations and bickering is well and truly over. The industry will have to learn to make decisions on the fly and finetune them while still running. The market and the industry is moving so fast that what appeared to be insurmountable issues are now of little or no relevance whatsoever two years later. Under the current process we are still involved in issues that are two or three years old and have long since lost their significance. This results in a lot of time-wasting by the ACIF and other industry bodies.

In conclusion, if the Regulators and the government are to retain any credibility at all the various regulatory initiatives need to be implemented within the next few months. As I have mentioned before, I can detect battle fatigue in the industry, with fewer and fewer people standing up against the ongoing delaying tactics and lack of action by the ACCC on processes, some of which have been going on for as long as two years.

By now we should be well and truly concentrating on the new world of broadband services, high-speed access, digital TV and datacasting – words which are still rarely uttered at the ‘traditional’ telecommunications industry meetings. At the same time industry bodies such as the AIIA and INTIA should play a far more leading role in the telco industry since the new world will be IT- and Internet-driven and not telco-driven.

Irrelevant and out-of-date USO Policies

Australia always seems to be at the back of the field. When the first round of deregulation occurred in the early 1990s, we ‘forgot’ to include the new service providers that in the end delivered more competition than the dupolist that was selected by the government to provide this competition. In the Telecommunications Act of those days the word ‘service provider’ did not appear once.

The next round of regulations followed in 1996. By that time the Internet had well and truly arrived and a few people, such as Professor Mark Armstrong and myself, strongly advocated inclusion of the new converging markets in the new Act. All to no avail. I tried to convince the new telcos to lobby with us on that issue, but everybody was far too busy with the good old telephone stuff. The Department of Communications, being the drivers behind the new Act, showed no interest whatsoever. Since broadcasting and Internet had nothing to do with their work on the telco policies they imitated the ostrich and stuck their heads in the ground.

Now the government’s ‘fire brigade’ is being called out daily to extinguish brush fires in the Internet, digital TV, datacasting and broadband areas, none of which are covered in a national policy or national strategy.

At the same time, as we have already mentioned, real implementation of the Act still has not begun. In the meantime the world is passing us by. The important communication issues have already shifted from the telephone over to the Internet, digital TV, datacasting and broadband services. If the government really wants to offer its citizens some state of the art communications services they will have to start including these services into their USO arrangements. It is ridiculous for us to be in the year 2000 and still to be talking about a telephone service that was a crucial focus during the mid-1990s. And now the ACA has argued that the government should increase the USOs from its current $280 million to $460 million. There are two reasons why this is ridiculous.

– Costs of telecommunications have dropped by 90% over the last decade and only 30%-35% of this has been passed on to consumers (approximately 60% to business users). Over the last year alone we have seen dramatic changes in local call prices. Within two years most call will be made via mobile phones, which are not covered by the USOs and the telephone network that is covered by the USOs will no longer deliver voice, as 90% of its traffic will be data communications and video based.

– Yet our USOs still mainly talk about telephone calls, and low-speed data on a more or less obsolete ISDN network. I think it is a great idea to upgrade the USOs, and even spend more money on them, but let’s get real and start talking high-speed communication access instead of telephone calls that will be free-of-charge to most users within the next 3 years.

And as for the bush – the new high-speed networks rely heavily on technologies that have to be installed very close to the users (fibre has to be installed within 1.5Km of users). In suburbia this might be fine, but there is little hope for high-speed networks to the bush, without a significant increase in the USOs.

The government has been talking for close to a decade now about how to organise the USOs. It is about time to bite the bullet and make their policies more relevant to its citizens. Furthermore the market is still monopolised by Telstra. For years the government has been talking about USO tendering processes, but once again we haven’t seen any action. Let us open this market up to innovative alternatives. True, there are problems regarding unravelling the Telstra network and interconnecting it with other networks and services, but let’s get started and solve these en route, rather than indulge in endless discussions, submissions, plans and reviews.

If the government is serious about full privatisation of Telstra then let us, the citizens of this country, also get serious and demand that before the government privatises Telstra it makes sure that all of us will have access to the information highway. At this stage Telstra can’t even deliver a reliable basic telephone service to large parts of our population – as evidenced in the regular ACA quality of service reports. So what hope is there of Telstra being able to deliver an information highway to all Australians?

Paul Budde

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Saturday, January 1st, 2000

The governments of the United States, European Union, Japan, South Africa, Canada, and other countries are working to develop a draft treaty on Internet security that would outlaw hacking and unauthorized Internet eavesdropping and surveillance, according to unsubstantiated Usenet reports. The reports suggest that the treaty would also ban Web sites that post lists of passwords and codes for unauthorized access to computer systems. Spam would not be covered by the treaty, the reports say. EU press officers did not comment on the reports.

(Source: Newsbytes)

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