In the deal that we witnessed this week between France Telecom’s Orange and British Telecom, we may be looking at a key change in the shape of European Telecommunications.
Orange has said that it will cease to market its own ADSL unbundled lines in the UK and instead will offer wholesaled BT DSL access. The difference is the cost of an increasingly expensive support operation at a time where its old Wanadoo branded broadband lines, which only changed to operating under the Orange name three years ago, have fallen from 1.6 million when that brand merger was announced, to 896,000 at the end of 2009.
But in a world where ownership of broadband lines was once deemed essential, this is another decision which comes straight back to both Network Neutrality, Over The Top video delivery and what we keep seeing as the potential death of the triple play.
Any operator failing to understand what these changes all mean is in dire peril. France Telecom would once have fought tooth and claw to retain its ownership of these lines, but as long as it is a well regarded customer of BT, and as long as it is protected, not by existing legislation in the EU, but by the commitment to build network neutrality legislation eventually, France Telecom realizes that it does not need to own broadband lines in order to have broadband customers both for VoIP fixed line service and video delivery, as well as to collect a margin on broadband brand ownership.
Sky in the UK does much the same ‘ it has unbundled exchanges, but realized that it could not cover the UK entirely that way, at least not quickly enough, so on the back of a regulator which has shown it is committed to both Network Neutrality and the protection of unbundled broadband ownership, and which has done the spadework to prove that BT can continue to make sufficient profits from broadband in a wholesaled world, Sky felt that it could offer broadband in a combination of wholesale and unbundled loop and that it can offer its version of TV Everywhere over it (this service has been live in the UK for about three years now) whereby PC owners who are also high end Sky subscribers, can watch Sky TV programs online as long as they register the PC they are having service delivered over.
Once an idea like that works successfully for a period of time then the rush for broadband line ownership begins to vanish. This has some interesting consequences.
First off, ISPs no longer have a ‘get out of jail free’ card, for when they are struggling economically. This is something that Tiscali found out when it put its UK broadband lines on the market last year ‘ and they sold for a fraction of what broadband lines were selling for a few years earlier. It is not only that ISP lines are bringing down less and less margin, but that the need for ownership in service delivery is then reduced ‘ all due to breakthroughs in streaming technologies and broadband reliability.
But at the same time this means that incumbents such as Orange (in France) feel that their money is better spent on getting themselves into the service eco-system, and France Telecom has built TV channels and acquired vital sports rights in its native France, and put together 63 mobile TV channels using 3GPP streaming. It is also the leading exponent of IPTV in France and is involved in DTT delivery there. In other words, in the longer term, the provision of services ‘ is more important, and potentially more profitable, than owning the lines that are used to provide triple play services.
So a long scrutiny of France Telecom accounts will show us that it owns lines in a number of countries, but that its IPTV services are only delivered over its own lines in Poland and France ‘ and even then not exclusively. In the rest of the countries that it operates in, it clearly plans to offer TV services using HbbTV technology (designed by French and German broadcasters) straight from the internet.
But this approach, as it becomes widespread around Europe, means that there is little point in owning the broadband line, except for the broadband revenues ‘ which are declining each year due to competition. In fact the margins are so tight that it is rapidly becoming a market which is no longer important to be in. The provision of broadband services in any given country is likely to fall further and further into the hands of the incumbent telcos and those companies themselves, are likely to be more and more defined financially, on how successful their services ‘ VoIP and TV are, over other people’s lines, or by their cellular activities, than by their ability to turn a buck on broadband.
For the consumer this is great news. Sky can deliver over any broadband line ‘ so everyone can get Sky. But so too can TalkTalk, the recently freed Carphone Warehouse operator business, which has the second largest number of broadband lines in the country. This week TalkTalk was letting it be known that its Tiscali TV (which is a full IPTV service acquired with Tiscali, which originated as the Homechoice TV service, purely for London) ‘ will be delivered over Canvas. Canvas of course is the BBC inspired IP based set top which will become a retail proposition.
So by this TalkTalk means that it will offer an adaptive streaming service, with no requirement for a Quality of Service component, brought straight to the TV ‘ in other words an OTT service. Homechoice struggled to unbundle enough lines to make its service popular outside London, despite being one of the best bouquet’s of TV services available. Most of the problem was that it had to build its own set tops, its own routers and unbundle exchange after exchange of broadband lines with up front investment in ISAMs and backhaul. Now it can offload this to a CDN and use streaming and standard retailed equipment at the set top level.
So we would expect to see more deals done with BT to take the responsibility back for looking after the UK’s broadband lines, where economies of scale will allow its wholesale operations to make money on pure broadband. TV and VoIP services will remain differentiated by brands ‘ with Virgin, TalkTalk, Sky, Orange and others able to build TV and phone brands. And that this model will extend throughout Europe gradually. It already operates this way in Scandinavia, and is starting to be looked at in Benelux (Belgium, Netherlands and Luxembourg) and will finally seep into France and Spain. Italy is seeing a big push into OTT services by incumbent Telecom Italia and Germany, as usual will be the last stronghold holding out against network neutrality, and will only cave in years later when the European Commission forces the hand of its regulator.
The new triple play then becomes a branding proposition ‘ you may buy Sky Talk, Sky TV and Sky Broadband and have it all delivered over a BT broadband line. BT’s role here is to do a great job of keeping down costs of broadband provision so that its wholesale lines are attractive enough in price to undercut other broadband competition in the market. If it wants to enter the services business, as it has with BT Vision, it will be measured purely on the quality of the TV service it creates, not on price leadership on TV due entirely to the fact that it owns more broadband lines and has greater economies of scale in broadband ‘ why should that be allowed to subsidize its TV pricing?
And then every operator neatly elects to be in two businesses ‘ TV channel creation and broadcast services (over the internet) and in the provision of hard telecoms infrastructure ‘ and these can be run at arms length.
What does this means for cellular operators? Well this is potentially a model of the future for cellular operators too, though they won’t thank me for saying so. OTT services are coming and constantly creating a Walled Garden, whereby other OTT services cannot get in, is no longer going to be tolerated. Mobile broadband will become a separate un-tethered business from mobile TV or gaming or VoIP services such as Skype.
Obviously mobile broadband right now is a landgrab which influences the market share of the respective operators in cellular, and it is vitally linked to these other services. But the network neutrality position of the European Commission will lead to legislation being enacted which doesn’t just affect fixed broadband lines, but also mobile. And it is these same video services ‘ in the UK, Virgin, Sky, TalkTalk, BT Vision, in France all the strong broadcasters such as TF1 along with France Telecom and especially pay TV suppliers like Vivendi’s Canal+ satellite service, will all invariably provide OTT services first over fixed line services, then eventually over streamed cellular broadband and finally they may adopt broadcast mobile TV as well.
Right the way across the continent we can see that same outcome, with independent ISPs struggling and being rapidly consolidated, while leading TV suppliers deliver OTT services and Telcos which have a foothold in content, extending that through OTT provision and rivalry as well.
In the US, the thorny problem of its legal position on network neutrality will need to be solved, because for as long as it holds back on OTT development due to the fear that operators such as Comcast and AT&T will be able to block OTT content, the longer its market will be under developed.
Meanwhile BT is creating a business simply running broadband and will give Orange a dedicated management system and take over Orange’s existing fixed-line infrastructure, which currently only reaches about 65% of the UK population.