Triple / Quad Play

There has been quite a bitter fight going on for the last 8 years or so (ever since Broadband reared its head) for the ownership of the Device That Lets (Comms and) Entertainment Into Your Home. Various Set Top Boxes (cable, satellite) held sway but over the 'noughties have had to duke it out with increasingly powerful multifunctional routers, IPTV boxes, 'net connected games machines, New New STB's like Boxee and of course MyPCTV (my PC controlling the TV set) which has held sway in Chez Broadstuff for some 4 years now, especially since BBC's iPlayer came into use.

Next up is the new Apple TV - or more accurately, the Apple Set Top Box That Controls the TV. It is definitely smaller and more stylish the Old Set Top Boxes (no doubt there will now be a rush to be thin, small and black among other STB makers).

But, while the chatterati all ooooh their way to their Applegasms, it is time for us more sanguine types to look at the overall value chain and ask "what has changed". The old Apple TV was a download and play (iTunes) model, the new one has streaming deals with TV stations and no memory at all. There is no new technology at play here, nothing in the value chain that doesn't exist already, no new "gee whiz" device - what is interesting is that Apple has done a complete shift of value chain model, from download to stream (because that is what most people like).

The really fascinating bit of this picture however, is if you go up one step in the system diagram. Apple now has a plethora of screens and devices that all interact with each other and with an end to end delivery value chain, from content via aggregation to user device. They don't own the distribution piece, but they have made deals with Moble Telcos that no one believed possible beforehand. I await similar with TV Co's (they have already pushed streaming prices down from $2.99 to $0.99). Appls pricing is now coming in at $99, a lot cheaper than most other STB's that don't come attached to large bundles of bloatvid.

And that is where it gets interesting. The big prize has always been to control the Home Multi-media Controller, and this Apple TV device - plus the apparent ubiquitous rollout of a new IOS4 operating system across all their devices - is another move in the Apple play to surround and then own that piece of turf.

By the way, I am no Aple fanboi, but I have been using the Apple Value Chain diagram in consulting to clients since iTunes came out, and what amazes me is that no other big player has replicated it as they have stormed moble music, mobile telephony/smartphones, the mobile web, tablest and starting now, Quad Play in the home.

Incidentally, I believe this is a more robust strategy than Google TV, as SAI notes:

Specifically, Google wants to turn your TV into a computer. Apple says people specifically don't want computers on their TV. Who will win?

Apple made it clear today that it's trying to complement the gadgets that are already in your living room and hooked up to your TV. Apple TV is an add-on -- it's basically there to provide a few extra streaming features, in addition to your cable box and videogame console.

This is not even a question by 2010, so I think Google strikes out at first base - we set up usage experiments with the MyPCTV concept in 2006/7, its clear that the TV is not a computer, but is part of a complex "4 screen" (TV, PC, Tablet, Mobile) end user world.

But more than that, the real thing Apple has going for it is that end to end value delivery system which Google hasn't replicated - not in Mobile (albeit they are putting a lot of effort in belatedly with Android), and not in Video.

Oh, and they own the end device - s. Never forget that...............

This does not of course mean they will win - but what they are positionng themselves to do is cream off a lot of early adopters, take massive market share early on with high margins products, make it expensive to roll them back.

Skype on the blocks for an IPO - GigaOm:

Skype, the Internet telephony company, is looking to raise up to $100 million in an initial public offering, according to an S-1 filing with the U.S. Securities and Exchange Commission. The company will be selling American Depositary Shares (ADSs) and will trade on the NASDAQ Global Market. The offering will be managed by Goldman, Sachs & Co., J.P. Morgan, Morgan Stanley and others. The offering was widely viewed as in the cards, though I admit it came sooner than I thought.

This is of course after it was sold to eBay for $2.6bn in 2005, and eBay sold on 3/4 for $2bn in 2009. A great example of major value add. And now it's back on the market lerss than a year after its sale/buyback?

At the "Constant $2.6bn" valuation model the last few years would suggest, this new IPO plan means they are looking to sell about 4% of the business. That's not really a big % (or amount) to IPO for, or to get both Goldmans and Morgan Stanley in the game.

Hmmm.......(as in, there is more to this than meets the eye)

It would appear that eBay does not actually own the IP for Skype, though the company paid $2.6bn + earnouts (a total of $4.1bn) for - GigaOm:

In March — a month before it announced plans for the Skype IPO — eBay filed a claim against Joltid related to the license in the English High Court of Justice. Joltid responded by terminating the license agreement between the two companies. According to eBay’s claim:

Joltid has alleged that Skype should not possess, use or modify certain software source code and that, by doing so, and by disclosing such code in certain U.S. patent cases pursuant to orders from U.S. courts, Skype has breached the license agreement.

The usual legal snipes ensued, with Joltid alleging in a counterclaim that eBay and Skype were infringing its copyright. Skype, meanwhile, asked the court to declare that it’s not in breach of the licensing agreement. The outcome is unclear, but without a resolution with Joltid the whole dispute won’t go to court until June of next year. That will delay a Skype IPO by months at best and, depending on the outcome, could hurt its chances of ever seeing the light of day.

In the filing, after noting that it’s confident of its legal position, eBay said ominously:

[T]here is the possibility of an adverse result if the matter is not resolved through negotiation. Skype has begun to develop alternative software to that licensed through Joltid. However, such software development may not be successful, may result in loss of functionality or customers even if successful, and will in any event be expensive. If Skype was to lose the right to use the Joltid software as the result of the litigation, and if alternative software was not available, Skype would be severely and adversely affected and the continued operation of Skype’s business as currently conducted would likely not be possible.

Although Skype hasn’t been integrated into eBay’s e-commerce business, as the company hoped it would be when the acquisition was announced, it has been an area of growth for eBay. Skype’s revenue grew 26 percent in the second quarter of 2009 to $145 million as registered users increased by 47 percent to 405 million.

If true, this is corporate incompetence on a breathtaking scale:

- What did they value the business so highly on, if not the IP?
- Why did they not at least secure a non negotiable right to use the IP, so that future strategic plans were safe?
- Who signed off a deal of that importance and size while knowing the IP was not secure - I'd not want them near any other company I was investing in.

Sometimes, you see things that make you think that the protection of "Limited Liability" on boards of directors should be waived!

I am a shareholder of eBay (a very small one, mind) and I am spitting mad! I predict a Class Action........

Interesting article from Point Research on the pricing of different Broadband options (seen in Ars Tech):

Around the globe, DSL remains far more expensive for the speed you get, but it has also shown the greatest drop in price. Between the first and third quarters of 2008, DSL dropped from $25 per megabit to $18 per megabit.

Cable prices haven't fallen nearly as much, but cable service remains a far better value on average. While DSL still costs about $1 8per megabit, cable is only $6-7 per megabit. Some of this excellent performance is driven by smaller European operators, which offer both lower prices and faster speeds than they used to. In the US, however, the report notes that "speeds have gone up but the price hasn't changed."

Fiber remains the best value—if you can get it—but it's also the most expensive option. Average cost per megabit is a mere dollar or two, but the average bill is $65. Countries like South Korea and Japan are largely driving the worldwide growth of fiber to the home, though companies like Verizon offer it in parts of the US as well.

This is all very interesting - as they point out, the reason DSL is so high on aggregate si that it is the only available system in many developing countries, but is highly priced:

Middle Eastern and African countries, for instance, are paying a whopping price for DSL service: $46 per megabit. In Western Europe, the cost is about $6 per megabit. Because phone lines are much more widely installed around the globe than are cable systems, DSL is one of the few viable delivery systems for Internet access in many countries, even when expensive, and is one reasons for DSL's high worldwide price.

Now the other side of this coin - Fibre is very cheap, but is very hard to get - and tends to mainly occur in countries where the government has stepped in to drive the market (Japan, Korea). We believe that intervening like this to drive the price down will confer massive digital logistics advantages to those countries, so it is with some concern we note the OfCom believes broadband buildout in the UK should be a private sector affair.

Notes Read/Write web:

Joost, the desktop-based long-form video service that aims to take on the old TV model with a large pile of venture capital*, is scrapping one of its defining features built in-house, inline chat, and replacing it with outside chat service Meebo. Essentially, the announcement means that users will be able to chat with all their friends on MSN, Yahoo Messenger, AIM and GoogleTalk while watching the high-resolution, professional video content on Joost.

Or just chat instead of watching the Ads

Still, its good that they realised that Metcalfe's Law applies to them as well.

And why Meebo of all people?

Meebo is a VC darling as well - this is the kind of deal that high-powered investors can help make happen, a great example of why people say it's as much about the connections as it is about the cash.

Quite. The market still has to buy it though.....

* And all the same old content.

...cos we weren't blogging at the time. We were a little bit sarky here though, if proof were needed that we thought it wasn't the brightest idea.

Anyway, its now finally been officially admitted that it was a crap deal

From CNet at the time:

Company executives said Monday that eBay plans to pay $1.3 billion in cash and $1.3 billion in stock to the global communications company. It has agreed to hand over up to an extra $1.5 billion, for a total payout of more than $4 billion, if Skype meets certain financial targets by 2008, according to a presentation to investors on Monday morning.

Well, apparently the earnout will be capped at $ 0.5bn, but that's still $2.6bn handed over including $1.3 bn of cash - for a c $60m turnover company.

Lesson - if any was needed - not to hand over so much of the loot upfront.

Mind you, it is very entertaining to go back and read the blogs at the time justifying why the deal was such a great one and how they "got" what eBay was up to

Those rumours that 3 is for sale just won't go away......John Hauxwell pinged me this afternoon with his post here. I had in the meantime picked up this one from the Inquirer picking up a Mail on Sunday story. (The Mail on Sunday also reported last last month that 130 managers were to be sacked at 3 UK, though 3 UK claimed that headcount will go up in 2007)

To be honest, I haven't heard anything about this, this time around, and was a bit wary of saying anything after the last time when the rumours of sale were immediately followed by that of a 3G price reduction to near 3G datacard levels - I thought I had got a bum steer.

Also, to try to crash the market just before you punt the company seems...errrm....odd?

Mind you, this is Planet Mobile where economic rationality is not always the first thing on the agenda (I will do a Big Blog on the Myriad Myths of Mobile Multimedia Moneymaking soon)

Still, you can't keep a good meme down......

Rumours are flying today that 3 UK is to be sold soon...its not just me that heard this, here is another swallow

No surprises really, its been clear for quite a while that the business model is bust, looks like Hutchison's deep pockets have finally been emptied. Very hard to compete in a hypercompetitive market like the UK, especially as 3G has been so slow to take off

So, who will buy?

It is now traditional in the UK for a foreign Telco to buy a UK mobile company, and we don't have a US one yet - but maybe BT could use it given its complementary assets - IPTV, DSL, Fusion et al.

Or maybe Google, as they say that YouTube will go Mobile and Yahoo and Vodafone have just eloped.

Or even Carphone Warehouse? Ntl and Virgin have got together so thats them out probably

Now we think Sky might be a good fit, after all this would give them a Quad play, and maybe all those MySpace users can get a free phone too

Interesting Times....................just a rumour of course

Postscript - Hutchison have apparently denied this rumour, and will instead announce a new business model for 3 UK tomorrow - more to follow later.....

Post Postcript - 3 UK announced today on their website that they are launching a new service model called "X - series". I quote:

It will extend several of the core applications and uses of the broadband internet to the mobile handset, with a new pricing model. The X-Series from 3 will be supported by the leading internet companies, cutting-edge handsets from the world's leading mobile manufacturers and premium customer service.

Customers will be able to make unlimited calls from their mobile using Skype, watch their home television via their mobile using Sling, access their home PC remotely using Orb and have access to the best of internet and messaging services from Yahoo!, Windows Live Messenger and Google.

The X-Series from 3 will be priced like fixed line broadband. It will offer use of mobile internet services free at the time of use, for a flat fee. The X-Series from 3 will be available in the UK from the 1st December 2006 and in 3's other markets around the world in early 2007.

So - a new pricing model, based on a flat fee from the 1st of December. US mobile companies are already doing "as much as you can eat" deals, so this is a welcomed plan. What has held the UK mobile media industry back vis a vis the 'Net are:

(i) adhering to a walled garden model, which guarantees a large % of a small pie rather than a small % of a big one. Didn't work on the Internet, it is not sustainable here - the mobile music market went elsewhere, and so will the video market under current conditions. Over the last 3 years new web 2.0 technologies and faster fixed line (and wifi) broadband have made mobile data services increasingly dated.

(ii) unrealistic pricing of services vs physical and internet based media (the dreaded "sticker shock" effect - £1.50 for the song, £5 for the download).

It does not look like the service is fully open, and as yet no details on the prices.

If the prices are set at Internet level then this is attempting to massively disrupt (crash?) the mobile 3G services market - not so much selling the company, as betting it!

Broadlogic announced the awaited TeraPIX video processor today, which (theoretically) enables cable operators to "triple their digital spectrum available." In theory, this device reclaims about 450 MHz of a 750 MHz spectrum by converting analogue cable channels to digital, thus freeing up bandwidth for lots of other new services to be run through the pipes.

As GigaOm notes, it:

allows cable operators to better utilize the spectrum inside the coaxial cables, triple the digital spectrum and basically give the plain old coax capabilities to take fiber to the home (FTTH) technologies head on, at least for now.

More than just that though...it potentially gives Cable companies a new play against DSL based services, including IPTV.

It does not require the user to invest in a new set top box, but the catch is that the Cable Co's have to supply a new residential gateway architecture built with these chips. Not sure yet about the economics of individual suburban houses, but in apartment blocks in major conurbations the battle between Cable and IPTV could get quite interesting.

So, after the dust settled this week it looks like Carphone Warehouse is no longer a mobile phone retailing warehouse cum Telco but a major ISP and network comms warehouse cum Telco. What is going on?

We came up with 3 possibilities for the AOL deal:

(i) Dumb money chasing an (apparently) cheap asset
(ii) An attempt to get out of their current hole
(iii) A cunning strategy that we have yet to grasp

Dumb money thesis first - on the surface, the AOL access business looks fairly cheap - £370m for 1.6 m customers, 2/3 of whom are broadband, all paying at least fifteen quid a month each in theory, so about 1 - 1.5 x revenue. Problem is that (i) a lot of this revenue goes out the door as cost already, and (ii) this market is only going one direction, and thats towards free - led by Carphone Warehouse among others. Even though AOL typically has the "family" market who traditionally are fairly 'net naive and slow to move, Free service will eventually triumph. This is so glaringly obvious that even the densest strategists must have seen it, so I rule out the dumb money option on that basis - for now, anyway - and assume they are trying to solve a wider problem.

So, that brings us to the second option - getting out of the current hole. Carphone started a Free (so long as you buy an £20+ per month bundled phone service) broadband service, which has been so succesful that they apparently are signing 15,000 people a week - only problem is they can't connect them, 200,000 out of 620,000 subs are still not connected. Those they can connect they annoy with lousy customer service in those fraught early setup times, hardly a smart play in a commodity game with low switching costs. The broadband service is expected to have lost £70m this year, and is subsidised by the juicy margins of its mobile customers. And, if its lost £70m on 400,000 broadband customers its not clear that doubling or trebling that is a Good Thing with their current infrastructure.

Right now this is being subsidised by the healthy nargins of flogging cellphones and voice telephony - but mobile is no longer a growth business, Vodafone has just pulled its distributor deal with Carphone and Orange will allegedly pull its deal later in the year, no doubt to get their hands on that revenue as they face leaner times. Ditto voice....VoiP is coming - so the margin money may well disappear fairly fast. Acquiring all those AOL users adds scale, short term revenue gain and no doubt the business case shows Significant Synergies, and margins of £30-40m are predicted by Carphone (which in practice are much, much harder to get of course ).

But access is a low margin business at best now, and neither AOL nor Carphone own the backbone side yet so are paying others for bulk haulage. So, after the dust is settled that is one huge future cash sink acquired and one huge cash source lost. Seems like this is at best an "if I dig fast enough maybe the old hole will fill in before anyone notices I have a bigger new one here" strategy.

Or is there actually a cunning plan behind all this. On Carphone's website, Charles Dunstone, CEO of Carphone Warehouse, said:

“The acquisition of AOL's UK Internet access business is transformational for our broadband business. This deal gives us significant scale to complement the rapid organic growth of our free broadband proposition. In addition, the joint development of AOL's already successful audience platform will bring us new advertising and content revenues in a proven and low risk manner.”

Ummmm.....but AOL still keeps all the content and thus the advertising power, so this is at best a point-through to Another Guy's Portal, guys. And who is this new revenue coming from - AOL takes but a small share of all the Ad money, Google, MSN and Yahoo take a lot more of it. The TechCrunch UK team have similar questions, comparing this deal with BT's position with BT Yahoo. (In defense of BT though, as the Previous Management had just spent all the family silver on Mobile licences it was having to flog whatever it could to keep the Manor in the family). Or did Carphone know the Voda blow was coming and were determined to Do Something before it happened?

At any rate, if there is a cunning plan I don't think its in the access business *as such*.

No, I think the cunning plan has been more about a bundle and sell strategy. Carphone Warehouse is rumoured to be in the sights of a number of Private Equity dealmeisters, and in PE land there are a lot of people looking, but far fewer decent deals, so even half decent ones get big premiums - how about a nice big triple play story?

Does it get sexier with a video play I wonder.....?