AI – rescuing the spectrum crunch (Part 1)

Chamath Palihapitiya, the straight talking boss of Social Capital recently sat down with Vanity Fair for an interview where he illustrated what his firm looked for when investing. “We try to find businesses that are technologically ambitious, that are difficult, that will require tremendous intellectual horsepower, but can basically solve these huge human needs in ways that advance humanity forward”.

Around the same time, and totally unrelated to Chamath and Vanity Fair, DARPA, the much vaunted US agency credited among other things for setting up the precursor to the Internet as we know it threw up a gauntlet at the International Wireless Communications Expo in Las Vegas. What was it: it was a grand challenge – ‘The Spectrum Collaboration Challenge‘. As the webpage summarized it – “is a competition to develop radios with advanced machine-learning capabilities that can collectively develop strategies that optimize use of the wireless spectrum in ways not possible with today’s intrinsically inefficient static allocation approaches”.

What would this be ‘Grand’? Simply because DARPA had accurately pointed out one of the greatest challenges facing mobile telephony – the lack of available “good” spectrum. In doing so, it also indirectly recognized the indispensable role that communications plays in today’s society. And the fact that continuing down the same path as before may simply not be tenable 10 – 20, 30 years from now when demands for spectrum and capacity simply outstrip what we have right now.

Such Grand Challenges are not to be treated lightly – they set the course for ambitious endeavors, tackling hard problems with potentially global ramifications. If you wonder how fast autonomous cars have evolved, it is in no small measures to programs such as these which fund and accelerate development in these areas.

Now you may ask why? Why is this relevant to me and why is this such a big deal? The answer emerges from a few basic principles, some of which are governed by the immutable laws of physics.

• Limited “good” Spectrum – the basis on which all mobile communications exists is a finite quantity. While the “spectrum” itself is infinite – the “good spectrum” (i.e. between 600 MHz – 3.5 GHz) or that which all mobile telephones use is limited, and well – presently occupied. You can transmit above that (5 GHz and above and yes, folks are considering and doing just that for 5G), but then you need a lot of base stations close to each other (which increases cost and complexity), and if you transmit a lot below that (i.e. 300 MHz and below) – the antenna’s typically are quite big and unwieldy (remember the CB radio antennas?)

Courtesy: wi360.blogspot.com

 

• Increasing demand – if there is one thing all folks whether regulators, operators or internet players agree upon it is this; that we humans seem to have an insatiable demand for data. Give us better and cheaper devices, cool services such as Netflix at a competitive price point and we will swallow it all up! If you think human’s were bad there is also a projected growth of up to 50 Bn connected devices in the next 10 years – all of them communicating with each other, humans and control points. These devices may not require a lot of bandwidth, but they sure can chew up a lot of capacity.

CISCO VNI

• and as a consequence – increasing price to license due to scarcity. While the 700 MHz spectrum auction in 2008 enriched the US Government coffers by USD 19.0 Bn (YES – BILLION), the AWS-3 spectrum (in the less desirable 1.7/2.1 GHz band) auction netted them a mind-boggling USD 45.0 Bn.

One key element which keeps driving up the cost of spectrum is that the business model of all operators is based around a setup which has remained pretty much the same since the dawn of the mobile era. It followed a fairly, well linear approach

• Secure a spectrum license for a particular period of time (sometimes linked to a particular technology) along with a license to provide specific services
• Build a network to work in this spectrum band
• Offer voice, data and other services (either self built) or via 3rd parties to customers

While this system worked in the earlier days of voice telephony it has now started fraying around the edges.

•  Regulators are interested that consumers have access to services at a reasonable price and that a competitive market environment ensures the same. However with a looming spectrum scarcity, prices for spectrum are surging – prices which are indirectly or directly passed on to the customer
• If regulators hand spectrum out evenly, while it may level the playing field for the operator it does nothing to address a customer need – that the capacity offered by any one operator may not be sufficient… leaving everyone wanting for more, rather than a few being satisfied
• Finally, the spectrum in many places around the world remains inefficiently used. There are many regions where rich firms hoard spectrum as a defensive strategy to depress competition. In other environments there are cases when an operator who has spectrum has a lot of unused capacity, while another operator operates beyond peak – with poor customer experience. No wonder, previous generations of networks were designed to sustain near peak loads – increasing the CAPEX/ OPEX required to build up and run these networks.

In the next part of this article we will dive deeper into these issues, trying to understand how an AI enabled dynamic spectrum environment may work and in the last note point out what it could mean to the operator community and internet players at large…..

The curse of the gatekeeper – thoughts on Eyeo and Shine

A trip up the Rhine is one of those quintessential romantic getaway’s that should be on everyone’s bucket list should they pass through Cologne, Germany. The calm meandering river, multitude of castles and vineyards that dot the hills are a sight to behold. When taking this trip, at a spot around a bend, one comes across an interesting sight. A mini-fort perched upon a rocky outcrop in the middle of the river. As the story goes, an entrepreneurial nobleman built it to collect levy from the numerous barges that moved up and down. Failure to pay nearly always meant that you were … well easy pickings to the cannons pointed right at you. Some called this simply a “tax collector”, others “a gatekeeper”…. still others an “extortionist” (among the kinder choice to words to be used).

It brings us to the subject of my note today – that of ad-blockers whether browser or network based (with Eyeo and Shine their key proponents). First, some basic context to this discussion is necessary. A majority of us are blissful consumers of the “internet” and in many countries it has become an essential and indispensable feature of our existence, along with water, food, electricity and telecommunications. Could you imagine life without it? One the the key reasons behind this dependency (and for many – an addiction) is the simple fact that most of it is free. You heard that right – FREE. When you pay your monthly Internet bill, you are not paying for the content, but to use the infrastructure that the cable and telecom providers have put in to access the internet. On the actual web itself you have two broad classes of content; transaction, such as web-shops where people hope you will buy something, and ad supported. While there are indeed a several instances of malicious advertising and malware etc., for many portal advertising is a necessary evil. The money earned simply pays the bills to create and host this content. Leading respected publications such as ARS Technica have come out in the public, pleading with their readers to allow ads, without which they would have to either turn to a pay per use (paywall) approach or simply turn off the lights. While the former approach does work in select cases (e.g. the Wall Street Journal) for a majority of long tail content, ads are the only source of revenue. Even sites such as Wikipedia raise money every year in order to keep their site ad free. That’s about it – either the consumer pays, or the advertiser pays, there is nothing like a free lunch.

This is where folks such as Eyeo with its Adblock Plus and Shine with its network based technologies enter the game. While free to download in the case of Adblock, it effectively blocks publishers from displaying advertisement unless they agree to pay Eyeo to be white-listed and adopt their standard. While they do have guidelines of what kind of ads are allowed, Eyeo still retains the ultimate authority on which ads are permitted and which not. The claim is the the user will have a “better customer experience”. Better than what? would it be better that the websites that users use went to a paywall model so that customers had to pay each time they accessed a website without advertisements, or that they no longer had access to the website because the firm went bust over a loss of revenue. In the case of Shine, advertisements are blocked at the network level; while some operators such as Three have signed up, others such as O2 have hesitated. Not suprising, while you may want to strong arm Google a bit, an operator still depends upon Google for its Android OS – and need to satisfy their customers. At the same time, advertising is also driving new revenue streams, so better to work towards more engagement rather than destroy this all together. Taking this in mind We must ask ourselves a few questions

1. Just as we may distrust Facebook or Google, can we trust a for-profit firm to have our best interests as a consumer? and in many cases – if it was a governmental entity – would you trust a government?
2. If we do not want to end up paying to access content or loosing access altogether, are we willing and able to tolerate advertisements as a necessary evil
3. Does better customer experience imply no advertisements at all – or perhaps, more relevant advertisements tailored to my interests?

If for any reason the first two answers are no, and we still do not want advertisements, then one option would be to charge a “tax” similar to the UK BBC tax or the TV tax in Germany. Although this may sound simple – it is a lot harder than you may think. Questions would arise such as “is this tax to be uniform – or dependent upon how much you consume; or how do you distribute the monies to all the content producing firms – especially if they may not even be registered in your country?” In this digital day and age – this is easier said than done. My hunch is that the solution lies in the third answer – to offer a better customer experience (to those who desire it) by more relevant advertisements. If you didn’t want to be tracked, you would still get advertisements, perhaps not as relevant – but this is a trade-off that you as a consumer would make.

This may sound as a death knell to the gatekeepers, but well – neither them nor the fortress on the Rhine were universally liked. By adopting a contorted vision of what a customer-centric browsing experience should be (tailored towards profit taking), it simply introduced a cost to a system – a cost which directly or indirectly would be passed on to you and me, the end customers.

The dynamic pricing game – where all is not 99c

Phil Libin the effervescent CEO at Evernote made headlines two days ago when he admitted that Evernote’s pricing strategy had been a bit arbitrary and a new pricing scheme for their premium offering would be launched come 2015. Although little was said about what the approach would be – I do hope it points to adopting a flexible pricing approach, and serve as a forerunner for pricing strategies to legions of firms down the road.

To put some context, many software providers (especially app companies) have adopted a one price fits all approach; i.e. if the price for the app is $5 per month in USA, the price is $5 per month in India. The argument has typically been one of these

1. Companies such as Apple do not practice price differentiation around the world, and yet they sell – so we should also be able to do the same
2. Adopting a one price fits all approach streamlines our go-to-markets and avoids gaming by users
3. It is unfair to users who would end up paying a premium for a product which can be sourced for a cheaper price elsewhere

From a first hand experience I believe that such attitudes have proven to be the one of the biggest stumbling blocks for firms to achieve global success. A good way to explain why is to pry apart these assertions.

• The Brand proposition argument – Although every firm would love (and some certainly do in a misguided manner) to believe that their firm has a premium niche such as Apple – harsh reality points in a different direction. There are only two brands who top $100 bn – and Apple is one of them; and no – unless you are Google, you are not the other! Even though your brand may be well known in your home of Silicon Valley, its awareness most likely diminishes with the same exponential loss as a mobile signal – its value in Moldova for example – may be close to zero. This simple truth is that there are only a handful of globally renowned brands (e.g. Apple, Samsung, BMW, Mercedes, Louis Vuitton etc) which can carry a large and constant premium around the world.
• The “avoid gaming” argument – this does have some merit, but needs to be considered in the grand scheme of things. Yes – this is indeed possible, but is typically limited to a small cross section of users who have foreign credit cards/ bank accounts etc. The vast majority are domestic users who are limited to their local accounts and app stores. The challenge here is to charge the same fee irrespective of the relative earning power in a country. While an Evernote could justify a $5 per month premium in USA (a place where the average mobile ARPU is close to $40), it is very hard to justify it in South East Asia (mobile ARPU close to $2) or even Eastern Europe (mobile ARPU close to $8). It then would simply limit the addressable market to a small fraction of its overall potential – and dangerously leave it open to other competitors to enter.

ARPU	$12.66	$2.46	$11.37	$9.20	$48.15	$23.88	$8.77
Region	MENA	APAC	Oceania	LatAm	USA	W.EU	E.EU

• The unfairness argument – also doesn’t hold true. The “Big Mac Index” stands testament to the fact that price discrimination is an important element of market positioning.

Even if you argue that you cannot buy a burger in one country to sell in another, the same holds for online software – take the example of Microsoft with its Office 365 software product, same product – different country – different price.

• That brings me back to the final point – $5 per month may sound like a good deal if you are a hard core user, but if you compare it with Microsoft Office 365 – which also retails at $5 per month, it is awfully hard to justify why one would pay the same for what is essentially a very good note taking tool.

Against this background, I do welcome the frank admission that this strategy is in need of an update, and also happy to hear that the premium path isn’t via silly advertisements. Phil brought up a good challenge with his 100 year start-up and delighted to know that he still is happy to pivot like one.  I do for sure hope that the other “one trick pony” start-ups learn from this and follow suit.

Al la carte versus All you can eat – the rise of the virtual cable operator

Recent announcements by the FCC proposing to change the interpretation of the term “Multi-channel Video Programming Distributor (MVPD)” to a technology neutral one has thrown open a lifeline to providers such as Aereo who had been teetering on the brink of bankruptcy. Although it is a wide open debate if this last minute reprieve will serve Aereo in the long run, it serves as a good inflection point to examine the cable business as a whole.

“Cord cutting” seems to be the “in-thing” these days with more people moving away from cable and satellite towards adopting an on-demand approach – whether via Apple TV, Roku or now – via Amazon’s devices. This comes from a growing culture of “NOW“; rather than wait for a episode at a predefined hour, the preference is to watch a favorite series at a time, place – and now device of ones choosing. Figures estimate up to 6.5% of users have gone this route, with a large number of new users not signing up to cable TV in the first place. The only players who seem to have weathered this till date are premium services such as HBO who have ventured into original content creation, and providers offering content such as ESPN – the hallmark of live sports. Those who want to cut the cord have to end up dealing with numerous content providers – each offering their own services, billing solutions etc. To put together all the services that users like, ends up being a tedious and right now – and expensive proposition.

This opens the door for what can only be known as the Virtual Cable Operator – one which would get the blessings of the FCC proposal. Such an aggregator (could be Aereo) could bundle and offer such channels without investment into the underlying network infrastructure – offering a cost advantage as much as 20% as compared to current offerings. This trend is a familiar one in the Telco business – and cable companies better be ready for this. Right now they may be safe as long as ESPN doesn’t move that route – but with HBO, CBS etc all announcing their own services, I believe it is only a matter of time. While the primary impacts to cable has extensively been covered – there are a few other consequences, and opportunities that I would like to address.

The smaller channels (those who charge <30c to the cable operators) will experience a dramatically reduced audience. Currently there was a chance that someone would stop by while channel flipping – with an al la carte service – this pretty much disappears, and along with it advertising revenue. An easy analogy would be that of an app in an app store – app discovery (in this case channel discovery) becomes highly relevant. Another result is that each channel would be jockeying for space on the “screen” – whether a TV, tablet or phone. I can very well imagine a scenario of a clean slate design like Google on a TV, where based upon your personal interest you would be “recommended” programs to watch – question is who would control this experience…

Who could this be –  a TV vendor (a.k.a a Samsung – packaging channiels with the TV), an OEM (Rovio, Amazon etc.), a Telco or cable provider (if you can’t beat them – join ’em), or someone like Aereo? The field is wide open and the jury has yet to make a decision. One thing however is clear – the first with a winning proposition – including channels, pricing and excellent UI would be a very interesting company to invest in…..

Finding Yahoo’s next Yahoo! moment

“Yahoo CEO set to refresh turnaround plan” screamed the headline across the pages of the Wall Street Journal. Sitting pretty on a pile of cash, fresh from Alibaba’s IPO, activist investors are now encircling the embattled media giant to do something. None seem to be content from her set of acqui-hires – Yahoo did get excellent technology and personnel. But the big question remained – was this being monetized, and worth the millions paid out from the war chest?

As a person who only uses Yahoo for email and weather on my phone, the value (and hence worth) provided by the firm is hard to justify. I haven’t ever clicked on any advertisement EVER on the portal, and these days I could be forgiven not to remember any advertisement on the page once I have closed it. With this I am not sure what my worth to Yahoo is, I would say – close to ZERO. One could argue that I have the same reaction with Google and/ or Facebook – but at least I spend 10X more time on those sites than on Yahoo, and engage with their different properties (a.k.a mail, news, search etc). I daresay I am not unique in my consumption of what Yahoo has to offer. In addition, Yahoo is no longer a startup and hence is evaluated in terms of quarterly results, revenue, margins and other standard KPI’s – a difficult position when you are in the middle of a long term restructuring plan.

And so I pondered, what should Yahoo do; or better still if I were in Marissa Meyer’s shoes – where would I focus…. These are my thoughts, drawn from insights into the sector along with its continued transformation.

1. Start by getting rid of the clutter – if you open Yahoo these days, the site is cluttered, darn cluttered (even after efforts this year). Although an improvement from the Yahoo of old, it is still a quagmire of many properties bought along from its many acquisition. It is surprising that it still remains this way, given Marissa’s pedigree at Google. It is a good ambition to aim to be the one-stop stop, but is it possible to achieve this without 100 different options (news, finance, ads etc) staring at you from the get go? I understand you don’t want to copy Google with the clean slate design, but well couldn’t one of your highly paid UI/UX designers come up with a better alternative?

2. Go mobile – where others don’t dare to go. If there is one place Internet companies have not fully invaded, is to go the Telecom route. Most have been content to piggy back as OTT services that users consume. The only challenge here is now you are competing for attention with all the others who have adopted a similar route. Whataspp made the first step in this direction with an MVNO in Germany – others are yet to follow. Yahoo has mobile, has data rich content and I daresay has the ability to upend the Telco market with a freemium strategy (search after all remains “free” to the user and is monetized indirectly) and capture an ever growing market of mobile adoptees. If there are any cardinal truth’s about telecom then it is the fact that mobile user base (across the world) is on an upswing (especially in developing markets), and so does their consumption of content. All around the world regulators are fostering new competition (see Mexico as a prominent example). So now, you do not need a network to offer a service. Be the first mover, use the MVNO route – and open up a whole new market.

3. Find the next Ali baba – within the developing world. This evolves from point 2 above. With Alibaba, Yahoo was able to get in early and strike it rich. Although acqui-hires are great for building up talent, bigger acquisitions such as these have to potential to provide the greatest impact. The BRIC states along with emerging economies such as Nigeria and Indonesia offer enormous long term potential, with current valuations incorporating some level of the risk. Although a long term shot, lessons from Alibaba can only serve as a guideline on the future benefits of such an approach.

So there you go, my top three choices. Two which could be addressed immediately and one moon shot for the future. I love my Yahoo account (it was my first email address), and I would hate to see it go the way of Myspace… the long darn and lonely march into obscurity.