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Technology Management Strategies
by Carrie Lewis and Andy EfstathiouEvent Summary
On April 8, IBM warned that its first quarter results would fall short of Wall Street's mark. The company advised that both revenue and profits would be down. Revenues will be down almost 12% below last year's first quarter performance—between $18.4 billion and $18.6 billion compared with $21 billion during the same period last year. Earnings per share are expected to be down about 30% to between $0.66 and $0.70 per share compared to $0.98 in first quarter 2001. IBM's hardware business (called Technology Group by IBM) had particularly weak performance with first quarter revenues down 35% for the quarter and expected losses at $200 million. IBM has pinned its revenue and profit dip on the continuing weak economy that has caused end users to delay IT purchasing decisions.
Analysis and Market Impact
We expect that the second quarter of this year will not be much better for IBM on the financial side, but that the remainder of the year will improve as Sam Palmisano, IBM's new CEO, executes tactical moves such as cleaning house and writing off IBM's hardware business debts in order to improve the bottom line in the short term. Much more important for IBM's long-term health is growing IBM's customer base by improving its value proposition to users. As we discussed in our recent Audio Conference and in our March 2002 Report on IBM, both entitled "Assessing IBM's Capabilities as an IT Service Provider," under Lou Gerstner, IBM returned to profitability by increasing sales from its installed customer base, but lost overall market share and did not expand its customer base beyond traditional Global 500 customers. We believe IBM's future growth—across all of its offerings—rests on changing its method of doing business and bringing to market new offerings that attract new customers.
Recommendations
- We expect that the economy will rebound in the second half of this year, but advise that IBM's rebound will fail to materialize in lock-step unless significant strides in strengthening weak lines of business are made. IBM's recovery is not contingent upon external economic recovery; internal improvements will be the drivers of IBM's turnaround.
- End users have been telling us that working with IBM is difficult, unless you fit its Global 500 customer profile. This is why IBM has failed to expand its customer base. To attract new customers IBM must soften its customer engagement model and bring to market new offerings at new price points that will attract a broader slice of the IT services market.
- Developing homegrown solutions to strengthen weak lines of business will not solve IBM's problems. Establishing partnerships or acquiring new capabilities is IBM's only way out; the time line for recovery is too short.
Media & Entertainment Strategies
by Ryan JonesEvent
On April 9, Michael Powell presented one of the boldest proposals of his tenure as FCC chairman by outlining new strategies for speeding the conversion of television broadcasts from analog to digital. In a two page proposal and keynote speech presented at the National Association of Broadcasters conference, Powell strongly recommended voluntary action to all members of the television value chain: content providers, broadcasters, cable operators, and consumer electronics manufacturers.
Market Impact
The transition from analog to digital television has been mired in finger pointing and false starts. After focusing regulatory efforts on broadcasters over the past six years, the FCC decided to turn its eye toward content providers—implicating them as the primary bottleneck. The commission strongly recommended that the top four broadcast networks plus two premium networks (ABC, CBS, FOX, NBC, HBO, and Showtime) offer 50% of their prime-time programming in high definition digital formats by next season. This challenge has already been accepted by ABC, and more will probably follow. If the majority of networks comply with the FCC's recommendation, we expect a significant acceleration of efforts from other value chain members.
Recommendations
- The federal government has already spent the money. Revenues from the post-conversion sale of the analog television spectrum have already been accounted for in forward-looking federal budgets. It's highly likely that Powell's bold recommendations stem from congressional pressure to ensure the timely harvest of billions of dollars in spectrum auction revenue.
- For the first time, television content owners get a digital kick in the seat. All members of the television value chain have cited a paucity of content as the main reason for a stalled digital transition. Until now, these content properties have felt little pressure to produce their content digitally. Now that regulatory pressure has been distributed among all parties critical to the success of digital television, the technology will advance more rapidly.
- Consumer electronics manufacturers praise and fear the recommendations. Television manufacturers, through the Consumer Electronics Association, have responded positively. They recognize that increased digital content availability will spur demand for new high-definition digital television—only 1.4 million high definition televisions had been sold by the end of 2001. However, manufacturers must also weigh Powell's recommendation to have the majority of their products incorporate expensive (currently around $200 per unit) digital tuners by 2005—a prospect they are cool to embrace.
Australasian Market Strategies, Internet Strategies Asia-Pacific
by Geoff LettsEvent Summary
Broadband's erstwhile bandwagons and banter rolled through the World Congress on IT (WCIT) in Adelaide, which took place February 27 to March 1. Adding to recent industry-driven initiatives (SPAN's BBX and ATUG's DSL and Broadband Special Interest Groups), and counterpointing Microsoft's broadside to government with its "The Way Forward" lobby paper, the prime minister unveiled two advisory groups to study and promote the use of broadband and the ICT industries: the Broadband Advisory Group and the ICT Framework for the Future.
Market Impact
Local industry is still piqued that in a recent OECD study, Australia's rating among the 30 member countries for broadband Internet takeup has slipped from 13 to 16. Microsoft pushed this home in its paper and called for broadband price transparency, open access to the local loop, and an environment for development of content-rich applications.
In his WCIT speech, the prime minister noted that the government had delivered on a core objective, promised in 1997, of getting all its agencies and services online. The Framework for the Future allows for a US$67 million ICT Center of Excellence. But this and other initiatives he announced add to a cluttered list of prior incentives. Recent broadband-assist programs include the National Communications Fund (US$27 million over three years), the Advanced Networks Program (US$19 million over four years), and the Digital Content Fund (A$1.1 million over three years).
Telstra (noted to be 50.1% government-owned) used the congress to announce a US$26 million package to stimulate the takeup and use of broadband services. Half of the package is associated with a development fund, which will use a board of government and industry representatives to oversee grants to educational institutions and accredited developers. Telstra will also contribute international bandwidth for appropriate development projects, and develop an educational advertising campaign for broadband use targeting business.
Recommendations
- Government agencies may be online, but where is the rest of Australia? The industry needs consumer pull. Both content and access suppliers must get the packaging right and develop compelling applications—fast browsing is not enough.
- Broadband services have been unstable; always-on services haven't. Telstra's broadband pricing has changed twice in the past six months. Provisioning delays abound. Access suppliers must show that quality is available.
- Government policy must acknowledge that broadband is a different market than TV and media in general. Broad-ranging content delivery must be facilitated.
- At present, broadband technology and supply options appear sufficient. Government incentives must be applied to building applications and stimulating demand—for example, portals to the arts, education, and sports should be progressed.
Small & Medium Business Technologies
by Mike LauricellaEvent Summary
On April 9, SBC and Yahoo announced plans to launch a co-branded portal early next year targeted at SBC's installed base of dial-up and DSL small business customers. Through this co-branded site fee-based services will be marketed to the business customer such as business class e-mail, advertising, and directory services, and financial reporting packages. Yahoo will receive monthly subscriber payments from SBC, and SBC will receive a revenue share on premium services purchased.
Market Impact
This event is significant not only for the parties involved but for all providers of broadband connectivity and small business applications services. Yahoo benefits from direct access to broadband-enabled businesses that are prime candidates to purchase subscription-based services. This is critical as Yahoo continues to decrease its dependency on advertising revenues. SBC gains from the revenue generated from the sale of applications and services. However, the most significant win for SBC is the ability to differentiate its Internet connectivity products and more effectively migrate business customers from dial-up to higher margin DSL service. SBC has invested considerable capital into its DSL infrastructure and must show continued subscriber growth.
Recommendations
- Competing carriers must fortify their small business offerings. Other carriers only have basic offerings in place—Verizon now has a relationship with Rivio; BellSouth has ties to Rivio and bCentral; and Qwest has ties with Microsoft only with respect to consumer grade offerings. SBC and Yahoo are raising the bar and other RBOCs must enhance their offerings.
- Beware of Microsoft and Intuit. Yahoo is not in this market alone, Microsoft's bCentral unit and Inuit both present considerable competitive threats.
- E-mail is the anchor. E-mail is without question the killer application, Yahoo must deliver a superior business class e-mail service and then look to up-sell other applications.
- Yahoo must increase its depth of small business services. To adequately meet the needs of a very diverse market Yahoo must present a broad portfolio of applications. Just two short years ago numerous small business-oriented portals were on the rise. However, all met with weak demand and are either gone or struggling.
Enterprise Computing & Networking
by Zeus KerravalaEvent Summary
On Thursday, April 4, the top three executives of the enterprise date equipment manufacturer, Enterasys Networks—Chief Executive Enrique Fiallo; Vice Chairman J.E. Riddle; and COO Jerry Shanahan—resigned and warned Wall Street of poor quarterly results. The resignation comes on the heels of the February announcement that the Security and Exchange Commission (SEC) was beginning to probe the company and as well disclosing that the Asia-Pacific division may have recognized revenues improperly.
Market Impact
The news can only spell doom and gloom for the former Cabletron company. With its top executives gone, its stock plunging to a record low, and Wall Street ratings on the company being cut across the board, Enterasys will have to undergo a significant restructuring in order to survive. Since the company has no debt, we believe Enterasys will survive, but after layoffs and other cost-cutting measures, the company will be much smaller than it is today. The enterprise data market is largely dominated by Cisco Systems today and this announcement will not impact the number-one vendor much. However, there is no clear number-two vendor in enterprise networking today and this is a good opportunity for the other enterprise "Cisco chasers" to gain some percentage points of market share. We believe that there is no vendor that is currently positioned to move into a strong second place but feel that Nortel Networks (mid-sized to large enterprises) and 3COM (mid-market) have the product lines to make a move, but must refine their message to the enterprises.
Recommendations
- Recommendations to enterprise customers: As always, we recommend that enterprise customers continue to evaluate all vendor relationships. We recommend that customers avoid purchasing equipment from Enterasys until the company announces its restructuring plans and the SEC finishes its investigation. When Enterasys starts cutting costs to remain solvent, research and development may suffer, meaning any relationship with the beleaguered company could be short lived. For companies that have a current relationship with Enterasys, have a contingency plan in place to move away from Enterasys if the hardware company discontinues products that are currently in your network.
- Recommendations to vendors: Stop thinking like engineering companies and start thinking like solution companies. Nortel and 3COM must develop a message to the enterprise that showcases their abilities to deliver an integrated suite of products that can deliver a robust communications infrastructure, similar to Cisco's AVVID offering. For the other data only specialists, most notably, Extreme and Foundry, develop a value proposition that is something other than "wire speed ASIC." As of yet, we have not seen any proof that either of these companies is capable of executing solutions-oriented selling versus a technology-oriented sales approach.
Wireless/Mobile Enterprise & Commerce
by Eugene SignoriniEvent Summary
In April 2002, IBM announced the launch of WebSphere Everyplace Access, a refocused version of its enterprise wireless solutions platform. The platform is a middleware solution providing enterprises with the ability to extend corporate applications in mobile environments.
Market Impact
The value proposition for WebSphere Everyplace Access (WEA) sounds familiar to anyone following the wireless middleware market—it provides enterprises with the ability to extend corporate data and applications over virtually any wireless network to virtually any device. So while the solution may not be revolutionary, the announcement is an important one for IBM. WEA succeeds in productizing a collection of wireless technologies developed by IBM's Pervasive Computing Group, which had caused confusion among potential customers (as well as analysts). WEA now presents itself as an enterprise platform with three components: a wireless application server, client software, and a development toolkit. This allows IBM to more clearly positions itself with a specific wireless technology option—and not just the ability to custom build a solution using extensive professional services and integration resources. This enables enterprise customers to better evaluate and manage the costs of their wireless initiative.
Recommendations
- WEA will appeal especially to large enterprises more comfortable working with large established vendors, as well as those customers of IBM's WebSphere application server product. The offering integrates closely with IBM's existing enterprise solutions such as WebSphere Portal, which makes this an attractive option for existing IBM customers.
- IBM still must develop more standardized offerings for its wireless enterprise initiatives, particularly on the application side. WEA provides connectors to Lotus Notes and Microsoft Exchange, and IBM has developed a strong relationship with Siebel, allowing for easy connectivity of WEA to Siebel's wireless CRM product. IBM must extend into additional ISV partnerships. This will make the WEA platform more attractive to enterprises seeking to extend existing workforce applications into a mobile environment.
- While IBM always represents a daunting competitive challenge, and has tremendous penetration within the enterprise, smaller middleware competitors can still take heart. With over 60% of enterprises looking to wirelessly extend corporate application access over the next two years, opportunity abounds. And our 2002 Corporate Wireless Survey shows that when choosing a wireless data solution, reputation and previous experience with a vendor are less important to enterprises than criteria such as performance, compatibility, scalability, technical support, and multiple device flexibility.
Wireless/Mobile Europe
by Farid YunusEvent Summary
As part of yet another broad strategic realignment, BT announced on April 10 that it would begin rolling out W-LAN hotspots in the UK. It will concurrently push private LAN systems, as an additional element in a multi-access business portfolio designed to capture a larger share of the corporate market. Cellular services will also be included through an agreement with its diverged mobile arm, mmO2, and both services are to be marketed via the newly formed BT Mobility Services.
Market Impact
Public access W-LAN services could not previously be offered in the UK, as the allocated frequencies were license-exempt. So BT's foray into 802.11 will become possible pending an imminent decision from the country's Radiocommunications Agency to allow the use of 2.4-5–GHz frequencies for commercial purposes. BT claims to already be in advanced discussions with a number of establishments, from airports to café chains, and has 400 hot spots planned by June 2003, rising to over 4,000 by 2005. The initial target will be enterprises, with BT providing private in-building systems, while enabling remote employees to access company LANs from public hotspots. A residential service is planned for later in the year. Deploying W-LAN infrastructure is relatively cheap, and BT expects total first year rollout cost to be less than US$14 million (£10 million)—a negligible sum next to 3G. But revenue expectations are also low, at US$43 million (£30 million) per year by 2004/2005. Corporate mobile services, however, are expected to generate US$215 million (£150 million) within the same time frame, and possibly US$700 million (£500 million) within five years.
Conclusions
- Having largely ignored W-LANs in the past, incumbent telcos are beginning to recognize that systems are being widely deployed within the enterprise, and demand for remote access will only rise. With fixed infrastructure for data backhaul largely in place, incumbents are uniquely placed to provide what is essentially a low-margin, supporting service, as demonstrated by last year's failure of U.S. pure-play MobileStar.
- The rollout of W-LAN hotspots has been underway for some time by the likes of Sonera, Telia, and Telenor. They have even developed their own mechanisms for integrating GPRS and W-LAN access and billing (interoperability standards are still being defined). Nevertheless, different frequencies and a host of internetworking issues will mean seamless roaming between cellular and W-LAN systems will not be possible for a number of years. Coupled with its limited range, 802.11 therefore facilitates access portability, but nothing like the personal mobility afforded by GPRS/3G.
- Through its resale agreement with mmO2, BT is suggesting that it is in a unique position to offer a converged data service offering to their large existing base of corporate clients. But the potential loser here is the publicly listed mmO2, which stands to receive wholesale as opposed to retail corporate revenues. If the converged proposition does indeed result in higher corporate custom, the approach will be justified in the eyes of shareholders, but it is a gamble that mmO2 cannot afford to lose.
Telecom Software Strategies
by Sharon BallardTrend
At the end of February, the OSS through Java Initiative released its first published APIs for a select group of OSS applications. Sun, in conjunction with a group of leading network equipment manufacturers, OSS vendors, and systems integrators (SIs) such as Metasolv, Telcordia, Telegea, PwC, Nokia, and Ericsson, have embarked upon the first phase in this initiative—defining and publishing APIs for a targeted group of applications. The end goal of the OSS through JAVA initiative is to create an integration framework that provides standardized APIs for communications-specific software applications but may also be shared with other industries.
Market Impact
The IT infrastructure for the majority of communications service providers is a bastion of proprietary legacy applications mixed with some third-party applications. The historical pre-competitive era tendency for CSPs to create proprietary OSSs in-house as well as the lack of existing standards for third-party software to communicate with other vendors' software has made integration a challenging and expensive cost of doing business for all CSPs. In addition, CSP requirements to always have their networks and systems available has created a situation where the costs of integrating a new software system may easily exceed three times the costs of the new software license. In an economic environment in which CSPs are under increasing pressure to not only decrease their costs of operations but roll out new services on the fly, the by-products of the OSS through JAVA initiative (i.e., standardized functional APIs) are crucial for the long term survival of all CSPs.
Recommendations
- ISVs will need to embrace the OSS for Java initiative. This initiative is the best near-term prospect the communications industry has at setting (loose) standards for OSS/BSS to more easily communicate with other systems. In an environment in which an individual OSS solution must interoperate with other vendor systems, it is imperative that an ISV get involved to become part of the solution and not the integration problem.
- CSPs must change their do-it-yourself approach to creating proprietary in-house software. The hidden costs in these custom developments become manifested in expensive and time-consuming integration projects for future software implementations—these additional costs will increasingly place CSPs at a competitive disadvantage.
Convergent Communications Europe
by Camille MendlerEvent Summary
BT's new CEO Ben Verwaayen cemented his leadership in the week of April 8, as he announced sweeping organizational and strategic changes in the beleaguered incumbent. Cost cutting will continue, and many jobs are still on the line, but on a more positive note, Verwaayen detailed a sober and pragmatic strategic agenda that bodes well for BT's future success and financial health.
Market Impact
Focusing on BT's fixed-line business and infrastructure, the company remains a formidable opponent to any challenger on UK soil. But Verwaayen took a pragmatic view regarding greater leveraging this infrastructure, by placing it under the direct control of BT Wholesale, which will be responsible not only for providing services to BT's retail divisions, but also to other operators. This move alone may ensure that the current infrastructure comes to be viewed more as an asset from which to derive incremental revenue, rather than an asset that must be protected at all costs from other operators. Indeed, investment in legacy technologies will halt as BT focuses on an all-IP infrastructure, indicating that such incremental wholesale revenues will help finance the infrastructure upgrade.
Meanwhile, as Verwaayen made clear, BT's revenue opportunities lie both in low-cost broadband connectivity to capture customers, and subsequently, services layered onto base connectivity. Relatedly, he outlined further aggressive pricing for DSL as the medium for such services. He predicted 1 million connections by mid-2003, a figure more aggressive than Yankee Group's latest UK DSL forecast, but broadly achievable in view of BT's recent DSL price cuts. BT's current activation rate is in the order of 10,000 DSL connections per month.
Regarding large business customers, Verwaayen conceded poor performance in maintaining many large accounts, no doubt due in part to instabilities in BT's global carrier alliances. These culminated this year in the severing of the AT&T relationship, dissolution of Concert, and emergence of BT Ignite as the primary vehicle for managing the lucrative multinational sector. And in a turnaround on strategy announced only six months ago, BT Ignite is to abandon attempts to target the European SME sector.
BT also announced new measures to reduce customer dissatisfaction by 25% per annum, although specific details of how this will be tabulated were not detailed.
Conclusions/Recommendations
- It is quite clear that BT strategists have strived to identify and categorize customer requirements and to shed higher-risk market development areas. Nevertheless, although it's an important step, this is only half the battle: the other half lies in execution.
- BT Ignite emerges as the division with the most difficult challenge. Once one of the most trusted and recognized brands in global telecommunications, the BT brand and the values behind it are tainted following the AT&T/Concert debacle. And as AT&T gears up its European operations, having retained some major European clients, BT Ignite will have to focus on operational excellence in customer service to recoup its position.
- BT's related assertion that it would invest in back-office integration with its partners, and potentially end-user customers, is another positive move. As Yankee Group research continues to stress, ownership of a vast transcontinental infrastructure is not the priority for business customers, it is the customer interface and operational performance that is highly valued.
Japan Market Strategies, Wireless/Mobile Asia-Pacific
by Naoto NakagawaEvent Summary
Japan's service operators last week announced their end of fiscal year 2001 subscriber numbers for cellular and PHS services. According to the announcements, the total cellular and PHS market sizes as of the end of March 2002 had reached 69.12 million and 5.7 million users, respectively. These figures represent an increase of nearly 8.2 million cellular users, and a decrease of 143,800 PHS users.
Market Impact
Due to the penetration level approaching 60%, year-on-year growth of the total wireless market has slowed compared with the last five years, during which the cellular market alone increased by 10 million users per year consecutively.
When we examine the market shares of the cellular service providers, NTT DoCoMo remains the dominant operator with 40.78 million users representing 59% of the total user base, followed by J-Phone (Vodafone) with 12.23 million users (17.70%) and KDDI's "au" at 12.21 million users (17.67%). It is the first time that J-Phone has taken second place and passed its rival au. We should note that KDDI's au user figure, however, does not take into account the carrier's other 2G digital service, TU-KA Cellular; nonetheless, the significance is not in the marginal differences between the user figures of the two carriers, but rather in the trends driving J-Phone's faster adoption.
Factors that have been driving J-Phone's faster growth include:
- A series of marketing campaigns that have successfully established and differentiated J-Phone's brand.
- Differentiating service features such as "long e-mail" that enable users to send up to 3,000 characters with the basic service plan. In contrast, the basic i-mode package limits the length of a message to 250 characters.
- The "Sha-Mail" service, which enables users to send still images taken by the camera phone as file attachments; and more recently the "Movie Sha-Mail" service, which allows users to send five-second moving images.
- Lower price points for the camera-equipped handsets.
Recommendation/Outlook
- As indicated above, the difference in user figures between J-Phone and au is insignificant. The market is still dominated by NTT DoCoMo, and this structure is not likely to change anytime in the near future.
- With market penetration approaching saturation, operators cannot count on significant increases in the user base. Consequently, service operators will need to develop services and features that will differentiate, win share, encourage usage, and increase ARPU.
- Service operators, network equipment vendors, and handset vendors in Japan are leading the global wireless market in 3G and multimedia services, technology, and network development. This advantage can be exploited in overseas markets as 2.5G and 3G networks are deployed—though most likely through strategic partnerships, due to the lack of experience by Japanese vendors.
Communications Network Infrastructure
by Nancee RuzickaEvent Summary
On March 22, Lucent announced the shipment of its new LambdaXtreme transport system to Deutsche Telekom for trial. The carrier will begin testing the 40-Gbps capabilities of the dense wavelength division multiplexing (DWDM) platform on its network this month. At the same time, rival Nortel Networks announced the sale of its new OPTera HDX switching/transport platform to TouchAmerica.
Market Impact
In what has been a stagnant market for long-haul equipment, there are signs that the hibernation is ending. Carriers that were content to add blades to sparsely populated long-haul DWDM platforms are seeing the economic benefit of capping the old systems and rolling out new ones. Reduced space and power savings, reduced per port costs, and 40-Gbps channels that are cheaper than 4 × 10-Gbps transport are prompting carriers to revisit their business cases. The resulting cost per Gbps per mile is expected to drop another 30% as a result of the new generation of equipment, and in this market, that is hard to ignore.
Conclusions
- The long-haul switching and transport market is undergoing a renaissance led by clear, concise carrier requirements. The most notable features of the Lucent and Nortel offerings, as well as competing products from numerous vendors are the similarities. The features and functionality—optical bypass, multiple distance transport, and integrated optical add/drop—are present in each platform. While the form and architecture vary, the requirements that the systems satisfy are the same. That means that carriers have stepped up with solid, consistent requirements. Carriers now know what they want in their long-haul networks and they are preparing and releasing RFPs requesting it.
- Optical switching and transport is not a dead market. As carriers beef up metro and access networks, the long-haul networks must be able to accommodate the resultant traffic. Carriers that were reluctant to embrace point-to-point optical switching and transport are being presented with a new generation of equipment that embraces A–Z connectivity while offering carriers more flexibility for reconfiguration, provisioning wavelengths, and managing traffic. An upcoming Report from the Yankee Group will evaluate both the new carrier requirements and new vendor solutions for core optical netowrking.
- The current crop of switching and transport products coming from the incumbent vendors will make it difficult for start-up and emerging vendors to get traction for their similar offerings. Incumbents have always had an advantage with the big-spending ILECs and IXCs, so success for a start-up will have to come from smaller carriers or as a partner to an incumbent vendor that does not currently offer a competing product (e.g., Tellabs, Marconi, Siemens).
Canadian Market Strategies
by Jeremy DepowEvent Summary
A coalition of Canadian cable and satellite television providers have filed a regulatory complaint to the Canadian Radio-television and Telecommunications Commission (CRTC) saying that the growing number of Canadians subscribing to non-licensed satellite services is a major problem. The coalition is made up of a number of service providers and industry associations including Bell ExpressVu, Star Choice, and the Canadian Cable Television Association.
Market Impact
The complaint is specifically aimed at CTY Telecom, which delivers unregulated direct-to-home satellite services across the country. The coalition is complaining that CTY Telecom is contravening the Broadcasting Act and represents a "real and substantial threat" to the Canadian broadcasting industry. It estimates that annual losses for producers, broadcasters, and distributors could collectively be as much as C$400 million (US$260 million).
Conclusions/Recommendations
- Despite the outcome of the eventual CRTC decision, the public attention that is given to the complaint will be extremely harmful for CTY Telecom's business. With implementation costs of C$650 (US$422) for the unit and C$100 (US$65) for the set-up fee, consumers will be hesitant to make such a large investment in a service that has the possibility of being ruled illegal.
- CTY Telecom has indicated its intention to contest the CRTC application with full force; however, given the size of the broadcasting coalition and the strength of its arguments, CTY has a challenging case to make. The Canadian federal government has also indicated that even if a legal process favored CTY Telecom, it would change the law.
Security Solutions & Services
by Matthew KovarEvent Summary
Ingate announced on April 8 that Telia International of Stockholm, Sweden will begin deploying Ingate's Voice-over-IP (VoIP) firewall—the SIPerator. The SIPerator is a customer-premises–based firewall for Session Initiated Protocol (SIP, the new IETF protocol for IP telephony applications), which allows an enterprise to open up a session on a traditional firewall and allows voice traffic to securely pass over the data network and manage the IP telephony applications.
Market Impact
One of the top five predictions for 2002 made by the Yankee Group Security Solutions & Services Report "Security Industry Predictions 2002: Where the Money Will Go," published in March 2002 was that VoIP security products would be deployed and tested throughout the end of 2002 and into 2003. The Yankee Group was clearly ahead of itself as Ingate is gaining traction with the announcement of a potentially several-hundred unit deployment in Telia's network. Telia International is a multinational carrier that provides IP transit, voice services, infrastructure, and carrier-neutral collocation services as a major provider of transatlantic IP traffic from Europe to the United States. This deployment, which is to be rolled out throughout its global enterprise, will be one of the most significant deployments of a customer-based SIP firewall to date.
SIP has been embraced by Voice-over-IP suppliers including Microsoft, Cisco, Pingtel, Siemens, Avaya, 3Com, WorldCom, Broadwing, GoBeam, Net2Phone, and TalkingNets. However, corporations have not been deploying the technology because of its inherent security weaknesses. The technology requires opening a range of ports on a corporate firewall and is a challenge to do this securely while masking and managing public IP addresses with private IP addresses on a corporation's network through network address translation (NAT).
Conclusions/Recommendations
- VoIP security vendors such as Permeo and Aravox, will be helped by this further validation of the market for VoIP security.
- VoIP deployments will no longer be in trials by the end of 2002 and significant services will be deployed by all enabled by customer-premises–based VoIP firewall technologies.
- Carrier-based VoIP security vendors will begin partnering with customer-premises-based VoIP security vendors to ensure end-to-end security from customers through the carrier cloud and both session and media gateways, and back again to the customer's network.
- Systems integrators should take advantage of a largely untapped opportunity by familiarizing themselves with the implementation and operational security issues surrounding VoIP technologies.
Brazil Market Strategies, Convergent Communications Latin America
by Adriana MenezesMarket Event
On April 8, Embratel announced its intention to take legal action against the local telephone operators because of their interconnection fees, which the company considers abusive. In Brazil, Embratel and Intelig must pay local interconnection fees for every call, for both the originating and the terminating carrier. In some cases, the cost of interconnection exceeds the tariff charged by the final client.
Market Impact
As local operators enter the inter-area segment, Embratel and Intelig will have the same competitive disadvantage they now face in the intra-area segment: for calls originated inside their areas, local carriers will need to pay interconnection fees only to the terminating carrier, and will have lower costs.
The local operators' advantage in interconnection cost, added to the fact that they will be new entrants in the inter-area segment, will allow these companies to price their services more aggressively. As the call-by-call carrier choice makes the long-distance segment extremely reactive to price discounts, Embratel and Intelig would lose a considerable portion of their market share immediately after the entrance of the local carriers in this segment.
Recommendations/Conclusions
- The maximum cost of interconnection is regulated by Anatel, which has already announced its intention to continue forcing the cost down. To foster competition, Anatel should push harder for a decrease in interconnection costs, which—together with the high taxation on telecommunications services—represent an obstacle to price decreases to the end user.
- Although price is a determinant in the choice of a long-distance carrier, Intelig and Embratel should continue with their efforts to retain clients through long-term promotions, such as friends and family plans, partnerships with airlines, and corporate plans, to avoid the loss of market share.
Wireless/Mobile Services
by Keith MallinsonTrend Summary
U.S. mobile phone distribution is dominated by the carriers—to a lesser extent than in Japan and more so than in Europe—but the vendors are eager to maximize branding and market share while not alienating the mobile operators that are gatekeepers to the bulk of their market.
Market Impact
The relationship between mobile operators and handset manufacturers varies substantially by geography, but online market developments and competition are set to elevate the names of device suppliers and broaden their distribution. Mobile operators have a stranglehold on distribution and manufacturers' brands are mostly submerged in the large Japanese market where technologies are unique and operators are few. Manufacturers wield much greater commercial power in Europe where phone brands are strong and often displace those of the network operators because demand is fragmented with more than 70 operators purchasing from a single market in GSM terminals and users can switch phones with great ease by moving their SIMs. In the large U.S. market with only a handful of major operators, carrier branded, dual branded, and manufacturer-only branded devices are sold through carrier dominated distribution.
Analysis/Conclusions
- Mass-market global brand advertising for handsets, as well as networks, is a vital stimulus for market growth and market share.
- The emerging duopoly of rival standards cdma2000 and GSM/WCDMA, strengthened by the demise of TDMA, iDEN, and PDC creates larger global markets for suppliers and further increases their market power versus operators.
- The complexity and expense in developing next-generation and more specialized devices such as wireless PDAs and mediaphones will extenuate economies of scale, further concentrate market shares in each device category and compel manufacturers to seek more control or diversity in distribution.
- In the face of slowing subscriber growth, handset vendors must maximize market traction by fully leveraging their brands by reaching out directly to consumers, leveraging their brands and partnering with third-party distributors such as GetConnected to sell handsets and service plans over independent or own-branded Web sites.
- Minor vendors such as Kyocera have the most to gain through alternative distribution, whereas market leaders Nokia or Motorola are reluctant to jeopardize their incumbent position in the dominant channel.
- Alternative channels are unlikely to take the lead in the United States, but carriers cannot ignore the incremental business they generate and handset vendors welcome not being entirely held hostage to just a few carrier contracts.
Convergent Communications Asia-Pacific
by Aditya PuriEvent Summary
India's Bharti Group and SingTel announced on April 9 that the i2i undersea cable network linking Chennai in southern India to Singapore had become operational and would begin carrying commercial traffic by the end of the month. The launch was inaugurated by a telephone call made by the Indian prime minister, who was in Singapore, to the governor of Tamil Nadu, the state capital of which is Chennai.
Market Impact
The cable system, which has a capacity of 8.4 Tbps and uses the latest dense wave division multiplexing (DWDM) technology, has been developed by Network i2i, a 50-50 joint venture between Bharti and SingTel. This event, which marks the completion of Phase I of the project, incorporates the completion of an undersea link between Chennai and Singapore, and terrestrial links between Chennai and other major cities in India, such as Mumbai and Bangalore. The second phase of this project will entail completion of an undersea loop connecting Mumbai, which is on the opposite coast from Chennai, around the Indian peninsula to Singapore.
The commencement of this service coincides with the introduction of competition in the realm of international long-distance (ILD) telephony, a monopoly until April 1, 2002, of quasi-state-owned VSNL. Bharti's management has promised to drastically cut ILD rates, in some cases by more than 50% of the current tariffs.
Recommendations/Conclusions
- The commencement of this service is a critical watershed occurrence in the evolution of the telecommunications landscape in India. High bandwidth prices in many developing nations have been assailed as a primary deterrent to widespread Internet takeup—India being no exception. Simple demand-supply laws would portend that the additional capacity (supply) would lead to lower prices for providers, which in turn should mean lower access costs for end users. It remains to be seen whether the reduced bandwidth costs for the ISPs will actually translate to cheaper access costs for the masses, reduce barriers to entry at the ISP level, and allow for greater access in the more rarefied areas of the country, or simply translate into healthier bottom lines for the ISPs.
- Bharti is rapidly establishing itself as the country's premier telecommunications conglomerate. Its myriad interests in telephony (fixed line and wireless) and data services, among others, help further bolster its position as a dominant telecommunications enterprise in India. Competitors and related constituents in the industry would do well to take heed and augment their own offerings appropriately, or risk losing out the one-stop-shop entity that Bharti is effectively creating.
Mexico Market Strategies, Wireless/Mobile Latin America
by Felipe GonzalezEvent Summary
On Thursday, March 21, the Nicaraguan government revoked the wireless license granted one year ago to the Mexico-based Azteca Holdings, alleging that it failed to honor the correspondent payment obligations. Azteca Holdings won the PCS bidding process in March 2001. Through its subsidiary, PCS de Nicaragua, the company offered US$8 million, defeating the only other bid of US$7.1 million from fellow Mexico-based competitor América Móvil.
The bidding conditions established that the license should be completely paid within a 180-day term, but PCS de Nicaragua only covered US$2 million, arguing that the international conditions in the industry had changed. The deadline was extended until December 2001, but Azteca did not produce the money. Nevertheless, on January 9—his last day in office—Nicaraguan President Arnoldo Alemán granted the license to the Mexican company, giving it an additional year to complete the US$6 million payment.
Market Impact
Not recognizing Azteca's last extension, the new government has cancelled the license. Thus, BellSouth will remain the only cellular operator in the country until the license is granted to another competitor.
This delay in the entrance of a competitive mobile operator will likely impede the positive developments that are usually associated with competition, such as market-driven price controls, better service levels, new services, and improved network coverage. Besides, time is on BellSouth's side, since every day that passes without an alternate carrier allows the American company to gain more advantage over any eventual entrant, which will erode the value of the competitive license.
Conclusions/Recommendations
- Though failing to cover payments is a justified reason, the cancellation could also be seen as part of a political revenge, since former president Alemán is being accused of corruption related to other aspects of Azteca Holdings' business in Nicaragua. The new government should carefully show that its decisions are law-oriented above all, in order to attract the international investment needed to develop the national telecommunications infrastructure.
- As soon as possible, the Nicaraguan government should define what will happen with the suspended band: directly assigning it to runner-up América Móvil, or conducting another bidding process open to international participants.
- This is the second time that Azteca Holdings failed to meet deadlines related to cellular license payments: in Mexico, its subsidiary Unefon took about a year to pay US$260 million for a national PCS band that it obtained through an auction in 1999. Azteca will have to more responsibly leverage its future bids, or risk an untrustworthy reputation that will bar it from auctions involving delayed payment plans.
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April 22, 2002
A Convergent Communications Latin America Audio Conference
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A Business Applications & Commerce Audio Conference
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