What does Google get from Youtube?

News talks of the $1.6 billion acquisition of YouTube by Google. In fine print there is mention that YouTube will remain a separate entity. I want to understand how is YouTube valued at Google's bid price.

I use YouTube. It offers fantastic service. Its simple to use and offers powerful tools. It offers a very strong value proposition around video sharing. And I had to look hard for their business model. Its a clever concept.

However when I compare with Google Video service, I don't see how You Tube can derive such large price out of its rival. I don't see anything that Google Video couldn't copy/substitute at a much lower cost. Additionally, such a development would not require Google to undertake the acquisition pains.

News suggest that YouTube has a larger user base. True, however YouTube offers viewers access to copyrighted video material mostly without permission thus offer a platform to increase piracy. I don't blame YouTube for that. However, Google with its clean image will have to develop checks and measures to stop the proliferation of video piracy. I fear that as Google tries to stop piracy in YouTube, it will loose the visitors and therefore a source of revenue. Also such a step will reduce the valuation of the business. It does not stop there. Creating a YouTube clone won't be much of a challenge. There are a number of them already. The visitors who move away from YouTube will choose to watch alternative video channels. My argument is to emphasise the point that Google Video has a lesser number of visitors not because of its content or lack of visibility. Its because of something that Google cannot do with its current public image.

In conclusion I think that YouTube acquisition is a costly decision where ROI calculations didnot factor in the potential threat of loosing visitors in wake of quality control and copyright protection.

Open source in telecom

Like in the operating systems, open source has come to telecoms. Spearheading the movement are two communities:

a) Asterisk
b) SIP Foundry

The community is quite extensive and geographically well spread. However the community is very restricted to the development of technical know-how. To add marketing and sales to these novel projects, four companies have been set up.

1. Digium: Founded in 1999, this company uses Asterisk as the base platform to develop enhanced suites to meet business needs
2. Pingtel: The base code of its products come out of SIP foundry. Pingtel focusses more on the support element to gain traction.
3. Fonality: Based on Asterisk, the company offers PBXtra- an advanced version of PBX using Asterisk base code. The value proposition of Fonality is around designing the communication architecture to offer best solution thus maximising customer value.
4. Hugh Symons Telecom: Recently launched SIPtrix, a Asterisk based solution developed by the distributors in-house technical consultants.

The big question is:

How successful will the open source players be?

Some analyst firms predict them to gain a market share of 1-2% in Europe by 2008. That effectively translates to anything between 21000-35000 lines depending on the market size estimates from different analyst firms. Most research firms agree that the initial traction for open-source solutions will be in the SMB space due to their lucrative pricing and close relationships/personal rapport that some of them enjoy in this segment.

However once the proponents of open-source demonstrate their products

a) reliability
b) scalability
c) security
d) features and functionalities
e) vendor support on customer lifetime management

that are close to acceptable standards, they will be able to negotiate a larger pie in the carrier market.

For example: Leading analyst firms have forecasted that by 2010, close to 15% of enterprise telephony will be hosted. This translates to approximately 3.8-3.9 million lines in Europe depending on whose market size estimate one refers to.

This is a significant market that open source vendors are likely to look into.

Nortel is trimming

Nortel executives are in advanced stages of discussion to sell of its UMTS assets to Alcatel. Nortel has a strong and comprehensive portfolio of access solutions that can compliment Alcatel's. This transaction will position Lucent-Alcatel closer to Ericsson who continues to impress the market with solid growth.

Mobile Hosted Solution- An opportunity!

During my latest industry briefing (August 2nd) I was asked to comment on "mobile hosted solution" by a mobile messaging and billing vendor who has recently invested in acquiring a platform vendor. Until a fortnight ago I could confidently say that mobile operators are only concerned over the strong anti-FMS (fixed-mobile substitution trend) and that they are looking at various options to mitigate the threat. However recently I have been involved in discussions towards creating a business model for one of the leading mobile operator in Europe. The operator plans to roll-out hosted business telephony services to enterprises. This is interesting from several points.

1. Entry of mobile operators in the enterprise telephony market will spice it up.
2. Ability to communicate business applications wireless with give credibity to the hosted proposition and in turn put immense pressure on customer premise equipment vendors.
3. Fixed-Mobile convergence and in turn triple convergence (data-voice, wireline-wireless, and IT-telecom) will move another important step closer to reality.
4. A new entity called "Managed Service Provider" will gain lot of traction.

The Zultys saga

Last week, the large scale lay-offs to reduce operating costs in wake of a funding crisis has crippled the operation and adversely affected the name of the vendor. Coming at a time when Zultys announced the launch of new products and a release that boasted of new capabilities in collaboration and messaging , Zultys failure to secure funding has devalued its branding significantly. Spotting the opportunity another innovative software based PBX vendor, Swyx invested with Google to divert eyeballs from Zultys to their website by exercising a cute marketing campaign.

There are a few takeaways from this episode. For one, the entry barriers have reduced significantly. However the importance of PBX hasn't dimished with the customers. This I believe is going to put significant pressure on the channel to constantly monitor their supplier's health to the effect to get contractual commitments from them to be in business.

Second is the intense competition in this market. The campaign launched by Swyx is indicative of the margins that can be gained when a software solution replaces a hardware product.

Why did LG Electronics lose Crane?

LG Electronics participates in the SoHo and sub-30 enterprise markets in United Kingdom. Their gear is imported to the UK by Crane and Capstan. The vendor enjoys a reasonable installed base in a market that is led by Panasonic and BT Versatility.

Recently, Crane announced its decision to severe relationships with LG. As reported by Comm Business, in a letter to its resellers Crane Chairman David George said:

“As you will be aware, Crane has communicated our intention to cease from the supply of LG products. In order to prevent a chaotic and disorderly market and transition, it has been agreed that Capstan will purchase all of Cranes inventory and will be the sole supplier of LG. We are no longer able to sell LG with immediate effect.

The sole UK distributor and importer for LG products is Capstan Communications. Any requests for support on LG product issues or queries must now be directed to Capstan.

Any outstanding and future technical support tickets, product issues, warranty requests, DOA’s and orders will be passed to Capstan with your consent.

Crane remains committed to continuing to support and build our LG maintenance & repair business and associated service contracts.”

It is interesting to note that Crane is happy to support its customers running LG gear, therefore protecting its customer ownership base. Apart from LG, Crane distributes Avaya, Mitel, Nortel and Samsung. This may help push Avaya's One-X quick edition.

It is believed that Crane was upset when LG Electronics announced the appointment of Capstan as a master distributor. While efforts were being made to diffuse tensions, I believe things didn't go as planned. Crane has over 20 engineers supporting 2000 LG maintenance contracts in the UK.

Speculating Alcatel's Q2,Q3 performance

In the last 5-6 years, the proposition of owning channels has undergone quite some change for large PBX vendors, at least in Europe. During this period, Alcatel's go-to-market shifted from being 100% direct to become 100% indirect. Still, its dependence on one channel (Nextiraone) can't be over emphasised.

As Nextiraone changed ownership recently, Alcatel's woes has begun. The channel is undergoing major restructuring that couldn't have come at a worse time for Alcatel. The vendor's merger with Lucent has exposed and sidelined their enterprise solution division. Adding to that is the poor uptake in France that lead the vendor settle for the number two position in shipments in 2005. And now, the restructuring of its primary channel.

I am told to understand that at the ground level, Alcatel is loosing base. Nextiraone's presence extends far and wide. Apart from France; Italy, Spain are affected. It will be interesting to Alcatel's Q2 and Q3 result. Knowing the great company that Alcatel is, I am sure they will take stock and react. And I believe their reaction might just become a good case study for the rest.

Product and Services-Gross Margins

Last week Nokia reported their second quarter 2006 results. Unfortunately, I couldnot attend the conference call hosted by Olli-Pekka. From their press release, it is understood that the quarter was a very positive one for the vendor, well yes, the vendor because when Nokia wore the service provider hat, it ended up in losses. Enterprise solutions reported an operating margin of (22%). How do we analyse this?

Motorola's Eric comes to help. I had a chat with him on Friday when he educated me on the offerings of Motorola's services business. They have recently merged their networks and GEMS (government and large enterprise) to form a single entity to offer end-to-end service and solution. Eric is heading the business in EMEA and CA . He helped me understand the business model and the financial outlays. Eric spoke about two extreme situations.

Case 1:

Network operators in mature markets are fanatic over control and they like to own their infrastructure. Hence, its a sell market. However, vendor financing is very strong in this space. On the other hand, in the greenfield opportunities in emerging markets, either the operator has a strong support from a financier who acts more as a guaranteer, or else the vendor helps the operator get upto speed, a fact that was coroborrated by the CEO of Ericsson during second quarter earnings call on the Friday last.

Case 2

Large enterprises believe in the mantra of 'core competence' and in 'efficiency'. Therefore, there is a general trend to out-task/outsource/offshore their infrastructure.

However, in both the cases, the comonality is the requirement of high capital outlay for the vendors to be compensated for regular long term revenue inflows. It is to be noted that the vendor bears the technology risk and this is affecting the value-chain. In today's world of fast changing technology, a new disruptor gives a vendor the edge for no more than 12 months, however, if he misses the boat, his value proposition drops by 10 points. When we compare the two and extrapolate over a $75 billion global market, with price differential on products dropping at an average of 11% in the services market, being a product vendor offers less advantages than being a service provider because-

1. Service provider is the prime contractor and therefore the owner of the account. This presents him with possibilities to upsell, cross-sell etc.
2. With operating margins in high teens, a price differential on products by 10 percent can be easily offset as products constitute around 40% of the total project in a typical multi-year managed service contract.

Mapping the pros and cons, while the gross margins drop to 30-35% in a services business, it guarantees longetivity.

Nortel partners with Microsoft

Microsoft is interested in unified communication. They propose to change the way enterprises communicate. They propose a people-centric model, which is markedly different from a network centric one that has been pervasive for the last 20 years if not more. But then the enterprise PBX market is saturated and most of the large vendors have strong relationships with their customers, why are they making a beeline to partner with Microsoft, who is unknown in the voice industry.

The reasons are deep rooted. While the market is owned by the traditional telephony vendors, the market is inherently hardware based. Microsoft believes that it can squeeze out some margins from these hardware products, thus forcing a bottom-line pressure on the telephony vendors.

From the announcement made jointly by Microsoft and Nortel, I feel that Nortel wanted to communicate its intention to move to the system integration space and leave the unified communication product gap to be filled by their partner. Like a move by IBM a few decades back.

Its not 'if' but 'when' calls will become free of charge

The telecom world is changing so fast these days. Not only is there a change in technology, but also a change in business models. I was reading a new item on Jagah, a PC based VoIP service provider. This company is planning to offer voice calls to the mobile, akin to the calling card world, but cheaper. If this offering along with several others come to mainstream, mobile service providers revenue stream from call processing and call transport will shrink. The will reduce these entities to charge for their connection (read to the web). The sad part will be the amount of mobile trunks and gateways that will become non-performing assets. In view of this, I would advise mobile service providers to get into managed contracts with the infrastructure providers and integrators and pay them a part of your accruals. This will help the mobile service providers adapt their business models and also share risks with partners.

From the consumers point of view, this is just amazing. Who doesn't want cheaper service. The only hitch will revolve around QoS and I personally believe that quality can be improved. Another problem will be around billing. The consumer might end up paying more than one service provider to stay connected to the web using the mobile device.

Finally, the looming threat of such a substitution will play a role in reducing the high service costs, a benefit consumers can enjoy.

Tax communication services?!?!?!

I was reading an article in 'IT Week' on plans by the EU to tax e-mails and texts. Before, I submit my opinion, lets have a look at the facts.

The article says that a working group in Brussles is reviewing a plan for an EU wide tax on texting and e-mail. It goes on to say that "the idea is to introduce an EU wide tax of 1.5 cents on each text message and 0.00001 cent on each e-mail."

It is estimated that around 196 billion phone text messages were sent across in Europe in 2005, and 5475billion e-mails (including spams). The tax if applied at the suggested rates will generate
€2.94 billion from text messages and another €0.54 million from e-mail. Let's not forget the exponential grow each of these services are having.....well, in case of imposition of such a tax, it would be prudent to say 'were' having.

Let's look at the scenario where voice calls are taxed too, say at the rate of 1 cent a minute. With over 966billion minutes of fixed-line traffic in Europe (82.585 billion in UK alone) and 447 billion mobile minutes in Europe (63.119 billion minutes of mobile telephony in UK alone), the total tax amounts to €14.13 billion (€1.46 billion in UK alone). Definitely, a huge sum of money.

However, as soon as such a tax is imposed, the market dynamics will change. Free SMS will be gone. The world of Yahoo mail and Google mail will have to treak their business models if they continue to offer free mail service. The pricing of data services in advanced third generation networks will be guided by the tax structure, thus all the discusions on pricing by size of traffic will be lost.

New service delivery models will become a difficult to pursue as even a nominal tax will increase the entry barriers. Further, enterprises would rather have premise-based systems instead of network based services. I can think of a whole lot of changes, however I will stop here to leave all my visitors ponder upon the idea.

How do you notice great ideas and nurture it to make great products?

Last Wednesday, I went to the Royal Ascot to meet Avanade, yes them and not the queen. However, I did take some pics of the queen when she came in her royal entourage and captured a smiling Princess Sophie.

Well, back to Avanade. This company formed as a 50:50 JV between Microsoft and Accenture can be put in the system integration space. Today, Avanade is 78% Accenture and 22% Microsoft. I was speaking to Mark, who is the Managing Director of UK. While the usual discussion on the market was going on, he spotted 'The Lexus and the olive tree' by Friedman and our conversation drifted towards globalisation.

I asked him, in this globalised world, ideas can come from anywhere. How to you create a system/process/framework to tap those ideas. His answer was simple. He said that Avanade has a colaboraton software with access rights for everyone. Avanade has a incentived program for contributing to the collaboration tool and the incentives are linked to their KPIs. The time spent in contributing is also factored in. Mark said that Avanade has done away with the old model of having an innovation team confined in a building in some corner of the world. I found it prety impressive. Mark has invited me to have a look at their systems. I just can't wait. Will update on what I see.

Why is this happening to Siemens???

Siemens AG has been in business for years. In fact, it remains one of the few companies that have survived the two world wars. Siemens Com is a relatively new entity, a flagship business that was formed to grow and dominate the ICT market.

However, call it the effect of globalisation, market dynamics or poor performance, Siemens Com came under speculation since the parent announced its financial results last year. The results clearly showed that Com, a private unit within Siemens AG was bleeding and affecting the overall profitability. With Siemens announcing their JV with Nokia in the service provider space, the future of Siemens Com came under cloud. Answering a question from the press, Siemens executives clearly stated that they are talking to two potential global partners. I expect some announcement between now and next two months. Of the people I spoke to at Siemens, I think they are more inclined to partner with a strong technology player. The only hint that I can offer at the moment is that the partnership will make the new entity number 2 in global revenues.

Today Siemens Com's enterprise unit makes revenues of around 13.5 B Euros globally, growing at 9% HY 2006 over HY 2005 (Siemens fiscal year is from October to September) in sales and has an operating margin of approx 3%. It employs close to 50000 people and has assets in all continents.

Google vs Microsoft in mobile market

Enterprise mobility is the name of the game. Every voice vendor worth its name is betting big on mobility, a headache for mobile operators. Another source of headache if the interest from fixed operators to enter the mobile space through backdoor eg. UMA technologies and cheap low power GSM licenses.

However, the main battle is elsewhere. The battle for money and control is raging between Google and Microsoft. Both see this market as important and both want a pie of the business. However, each has its own business model.

Microsoft aims to gain traction from the mobile version of its windows OS, handsets and mobile edition of enterprise software. It also intends to provide middleware and integrate the handsets to enterprise apps. However, Google wants to run a network based search and apps solution on the mobile phone, where advertisers pay for the service. It remains to be seen who finally eats the pie.

My latest briefing-Europe Enterprise Telephony Market Update Q1, 2006

I am taking the liberty to post my briefing that was free to attend. The customer premise PBX equipment market is growing faster in Europe than it did the same quarter last year and I am expecting a surge in growing following a dull year of 2005.

Siemens Com emerged as the market leader followed closely by Alcatel. I attribute Siemens emergence as a market leader to France's poor uptake. Alcatel lost close to 2% due to the very low uptake in the French market.

Another interesting trend is the price pressure. The market seems to emulate vegetable selling as prices continue to drop alarmingly. Last year saw system and line prices drop at an average of 9% and this year, I am expecting it to fall by some 11%. With cost to sale remaining the same or increasing, vendors have to look at new markets to grow their bottomline.

Finally, vendors don't seem to enjoy good financial health in this industry. Nortel reported a 0.4% opearting margin although their gross margin was close to 40%. Siemens Com is a price player today, their operating margin loom at a low of 3%, while Alcatel with its large indirect sales force enjoys a healthy margin of 11%. The highest margin amongst the vendors is reported by Cisco, whose products aren't cheap.

New blog

Hiya!

I have started this blog...to share my thoughts on the enterprise communication industry and market. With my background as a analyst with Frost & Sullivan, I look forward to share with you my insights, things I cannot write officially.

See you soon,
Shomik