if connected

Today’s government report into the development of the digital economy in Britain is wide ranging. But I’m going to focus on one area, broadband.

There are two key initiatives, plus lots and lots of talk:

A universal service obligation of 2Mbps for all by 2012. An USO for broadband is long overdue. But for those living in rural areas unserved or poorly served today, this speed will prove unsatisfactory. Already, average broadband speeds are over 3Mbps in the UK. By 2012, speeds will have risen again. The best that 2Mbps will do is reduce the height from which people fall when they live outside the peaks of urban broadband excellence. Nothing more. 2Mbps by 2012 is yesterday’s speed tomorrow.

A tax of 50p a month on all fixed line telephones to support rural broadband development. This is controversial and in my view will prove ineffective. The argument in the report is that fibre roll-outs to one third of the UK are uneconomic and this tax will deliver a subsidy that will hasten fibre infrastructure builds nationally. I see several flaws:

1. BT aims to spend £1.5bn to reach 40 percent ish of the population that live in relatively cheap and easy to reach urban areas. By comparison, the total return on £6 per annum for each of the 34m or so fixed telephone lines will not go far given the scale of costs for fibre indicated by BT’s plans.

2. Fibre deployment has barely started in the UK’s cities. BT’s network kicks off early 2010. It’s far too early for anyone to make significant deployments in rural areas where the number of people that would benefit are far less. I suspect either the £6s in tax will stockpile somewhere in the interim, or the monies will be used to support the more modest target of 2Mbps rural broadband (ie the universal service obligation).

3. Given the best will in the world, it will take much time to install fibre networks. Roads must be dug. New equipment must be given to consumers for their homes. New network links must connect exchanges and central offices to central national backhaul infrastructure. It’s inevitable that the initial deployments will be in the cities, even with this additional economic sweetener. And, fibre will take years and years to do.

For the forseeable future, cities will enjoy markedly faster broadband than rural areas. The advent of fibre, regardless of this government initiative, will increase that speed difference. Two tier broadband is coming whether or not this government likes it.

Yesterday VirginMedia announced it would cut 2200 jobs, 15% of its workforce, to take effect around the end of 2009.
On the radio, I heard this reported as being a result of the current downturn in the UK (in the third quarter the UK experienced negative growth). But VirginMedia’s reasoning is not the result of a change in consumer spending.
The problem VirginMedia face is that they have been carrying billions in debt generated during the rapid expansion of cable networks in the UK during the 90s.
Over the last few years, the level of market competition that VirginMedia has faced has limited VirginMedia’s ability to generate significant enough revenues to retrieve their position. The vaunted multi-play that has been at the core of VirginMedia’s strategy has resulted in a war on multiple fronts: in TV against Freeview and Sky; broadband versus Carphone Warehouse, BT, Orange, Sky, Tiscali; and home phone against Carphone, BT, and numerous others.
VirginMedia’s announcement was a hangover from last time’s problems, combined now with the greater difficulty in raising capital and sustaining existing debts caused by the credit crunch. Effects of changes in consumer spending will take longer to come through. There may be more pain to come.
Read related research on the economic downturn from us. More will follow soon.

Info on the ruling.

Unlimited broadband = 12 minutes – My take in April on the detail of this traffic management scheme.
As I’ve said before, it is in the broadband industry’s interests to be clearer and less ambiguous on the way they market broadband and broadband speeds.

Otherwise if the market is opaque and confusing, no ISP will be able to charge a premium for faster, quality, broadband as no consumer will be able to tell which service is better. Result: all ISPs will suffer declining revenues as consumers opt for the cheapest services.

I’ve been mulling over some new UK and European consumer data on attitudes to speed which makes for extremely scary reading for ISPs (clients please ask). It will be published in a forthcoming report.
In the meantime, have a browse of some of my earlier analysis of broadband marketing, the ASA and VirginMedia. As you will see, I’m not even slightly surprised about this ASA ruling!

VirginMedia is far from alone in stretching the truth, but this is the first major ruling that has gone against them. Most of the previous ASA rulings have focused on VM’s competitors.

VirginMedia’s traffic management, which is what the current ASA ruling that VM lost is about.
VirginMedia and a previous ASA ruling which VM won.
What Ofcom is doing from an industry perspective, as like me, Ofcom realise it’s in everyone’s interest to sort this out.

VirginMedia has secured iPlayer content for its VOD service. This is an approach I advised Internet video suppliers to take in this report. It’s great to see that traditional TV industry players like VirginMedia better understand the potential for free Internet VOD than do two out of the three leading games console makers, despite those games console makers’ video strategies.
There are two reasons offering iPlayer on the normal TV VOD platform makes sense for VirginMedia:
1. Offers VirginMedia’s users better picture quality than the PC Internet version of iPlayer and displays the programmes on the TV through the normal cable set-top box. This increases the value of VirginMedia’s TV offering to consumers and should help customer retention.
2. Reduces the pressure on VirginMedia’s overstretched broadband system. More here, under fig 3, especially.

So, net neutrality is bollocks? Virgin Media’s CEO Neil Berkett sounds like he’s a little out of his depth here. In Europe, bus lanes help buses go faster, as the lanes are less congested with other traffic, and not slower as he implies.
Worse, there is a knotty communications conundrum for ISPs here: For consumers, boosting one company’s content delivery speeds, will look just the same as slowing or blocking others. Consumers will just see the difference in relative speeds. They will have no idea whether one content site is being degraded, or the other boosted, or whether both processes are taking place.
Also, taking payments from the content industry for higher quality and higher speed content delivery, damages ISPs’ goal of being seen as just a mere carrier that is not responsible for what passes over their networks. This is a pandora’s box of future problems for ISPs…
VirginMedia looks to have decided to go down this path: it’s talking to Phorm on behavioural targeting; open to payments from content companies; is traffic shaping users heavilly to control its bandwidth costs; and is the lead UK ISP advocate of three strikes bans for persistent file sharers.
The problem for VirginMedia, is that these actions are at complete odds with its strategy of differentiating from other ISPs on broadband speeds as well as sitting extremely ill at ease with the Virgin brand.
VirginMedia is rapidly gaining a reputation as the friend of large companies, rather than the consumer champion that other Virgin-branded businesses have successfully positioned around in the past. So much store was placed on the Virgin name when ntl and Telewest switched brands in February last year that it’s a travesty not to play to the brand’s strengths as the consumer’s friend.

Below are the data limits listed on VirginMedia’s traffic management page. These data limits apply during the peak hours between 4pm and 9pm. When a customer hits the data limit their speed is cut and then the lower speed stays in force for five hours.

Separately, on VirginMedia’s own broadband frequently asked questions, Virgin say:

“What does unlimited broadband mean?
No download limits. Unlike some of our competitors, you get unlimited° downloads as a basic right so you can load up on music, films…whatever you’re into.

VirginMedia traffic management page:

This, remember, is the ISP that has persuaded the ASA to allow it to advertise “super dooper fibre optic broadband”, when VirginMedia’s network is really a standard hybrid fibre-coax network (ie HFC, and which because of the coax element has tremendous issues if consumers on the same street use the service too much, unlike a true fibre to the home network).

And, the ISP industry wonders why they aren’t able to persuade consumers to pay more for quality, unlimited, broadband! If the industry wishes to increase its ARPU then it needs to be genuinely open and honest about how it communicates broadband package details. Consumers need to know which packages offer better features and performance, or more data usage.

The implications of the above table for the content industry are hideous as most consumers will be using either the M or L package tiers:

• A single iPlayer TV programme download is likely to trigger the speed drop on the M tier.
• One Playstation 3 game demo download will trigger it on both M and L package tiers.
• One (paid and legitimate )movie download will likely trigger a user’s speed to be cut on both M and L package tiers.
• Most consumers will probably not realise why their download is going slowly, and will likely blame the content provider rather than VirginMedia, or just give up.

Today, VirginMedia report their q4 2007 results. As usual, as an industry analyst I’ll comment solely on the operationals. Note – this is being written ahead of the conference call.
Key points:
- Broadband customers are up year-on-year to 3.5m using VirginMedia’s hybrid coax-fibre (HFC) network — plus another 287k using DSL — and also up compared with the previous quarter. But the growth is slow, especially when compared with arch-rival Sky’s recent broadband successes.
- Cable triple play penetration increases further. Double play is now 79% of customers, and triple is almost half.
- Churn down to a monthly 1.4%, from the flat 1.8% -> 1.6% -> 1.8% -> 1.7% of each the previous four quarters. This quarter’s churn may be a blip. Certainly, across the previous four quarters churn was flat while the penetration of bundled customers was increasing. Churn levels remain far too high.
- Telephony customers and total customers fell. I suspect the latter is due to the former as VirginMedia has more telephony customers than either TV or broadband subcribers. Remember, unlike many cable companies, VirginMedia is effectively a home telephony incumbent that is at risk from cheap VoIP and CPS offers, rather than a cable company that could benefit with increased ARPU.
- Per customer [home] ARPU is slightly down to £42.24 from £42.82 a year earlier. Given the penetration of bundled customers has increased during the same period, this reflects the tremendous competitive dynamics of the UK market in driving down prices (broadband especially) has proved a more significant factor than bundling.
- No reporting of quad play penetration that I can see. I presume it is either not at a significant level yet, or is not progressing as well as VirginMedia would like.
Outlook – this is a challenging market for a cable company. VirginMedia must execute well, or Sky and BT will continue to cause VirginMedia problems.
There will be more analysis on the relationship between churn and multiplay in a forthcoming Jupiter report.