Ending the Telco-OTT Cold War?

In March 2008, The Sunday Times newspaper in London published a remarkable story. A married British couple had unexpectedly found themselves facing a monthly mobile phone bill of £11,000 (more than $17,000 at current exchange rates). The wife had used her husband’s phone, which had an unlimited broadband package, to download four episodes of the television show Friends. This would have been covered by the price of the broadband package, except that the husband had travelled to Germany without realizing that the 12-hour download was still underway. As the couple found out, downloads that occurred overseas were not covered by the package, and meant extra charges — big ones.

To a large degree, the newspaper story reflected the high cost of roaming charges overseas, and resonated with consumers for this reason. Since then, European rules have been introduced to limit sizes of phone bills, and reduce prices, although the issue is still contentious.

The story also touched on another trend. People increasingly want to view large amounts of Internet content online, especially video, and to use broadband wherever they are, on smartphones, tablets and laptops. And they want sensible and reasonable ways to pay for these services.

Even within their home country, consumers often struggle to use mobile devices to view Internet content because of network limitations and congestion, slow connections, and usage limits or high prices.

To meet growing consumer demand there will ultimately have to be massive infrastructure investment. This matters not just for telecom companies, but also for hardware makers that are keen to sell Internet-enabled devices, and for Internet companies that profit from increasing broadband access. They are all interdependent, and the scale of the challenge is huge.

Internet use is growing remarkably fast, and will continue to do so. The latest Cisco Visual Networking Index forecast issued in June contained striking statistics. Total global IP Internet traffic has increased eightfold over the past five years, it said, and will increase fourfold over the next five years.

Mobile device use will show amazing growth, with mobile data traffic expected to grow 26 times between 2010 and 2015 — a compound annual growth rate of 92%.

And video will particularly increase the volume of data. This year, Cisco forecasts, video will account for half of consumer Internet traffic, and reach 62% by 2015, excluding peer-to-peer file sharing. In 2015, one million minutes of video will cross the Internet every second.

Of course, we can expect new technology that will handle ever greater volumes of data with increased efficiency. Just as Moore’s law in computing famously predicted that the number of transistors on a computer chip would double every two years, in practice meaning more powerful computers and a lower price per unit of processing power, a similar “law” might be created for mobile Internet. It would point to a rising volume of Internet traffic and a falling cost per unit of data.

How such progress might evolve, and how the installation of new technology will be paid for, however, is less clear. There have been suggestions that telecoms networks might, for example, charge certain Internet companies a premium to give them a faster connection to customers, and so a competitive advantage — a proposal that has sparked controversy about net neutrality.

There has been innovation in the face of the problem. For example, Atomico, the international venture capital firm I founded, has invested in a company called Fon, created in 2005 by Martin Varsavsky, a brilliant entrepreneur.

He had found himself wandering Paris in search of a Wifi hotspot and had started to think laterally. All around him were people using the Internet in their homes, but he could not find a Wi-fi point.

His answer to this mismatch of supply and demand was simple with hindsight. Users of Fon receive a special wireless router that allows other Fon users to access a part of their home broadband capacity. In exchange, they can do the same, using others’ broadband connections as they move around a city. It is particularly useful when travelling overseas as a way to avoid roaming charges.

This not only benefits consumers directly, but has increasingly proved attractive to telecoms companies. In effect, Fon redirects mobile Internet traffic onto fixed line networks, freeing up mobile capacity. This has helped Fon strike deals with a whole range of telecoms companies in different countries, and there are now nearly 5 million of its Wi-fi spots worldwide.

Of course, I’m not suggesting that Fon alone is an answer to the huge increases in mobile data traffic we will see, or will negate the need for massive infrastructure investment, not least because people want to use mobile devices on trains and so on. But as mobile Internet traffic increases, innovation will occur, and as an entrepreneur I know that there will be advances and opportunities.

Ultimately, however, there will still have to be infrastructure upgrades, and consumers will somehow have to pay for them. As well as improving efficiency, telecoms firms will need to find further revenues. How might this happen?

Perhaps there will be some kind of payment API used by telecom companies, meaning that when a transaction takes place online they get a fraction of the revenue. After all, credit card companies have traditionally taken a fraction of transactions for goods and services in exchange for supplying a data network that facilitates them.

Although I’m still formulating my view about what is likely, I suspect the fact that telecoms companies have existing payment relationships with customers via their phone bill could somehow play a significant role in the way that developments unfold. It will be fascinating to see.

 

Zennstrom is co-founder of Skype and CEO and founding partner of Atomico, an international venture capital firm

 

 

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