09 March 2003

Sally Trebble

Research reports are predicting that DVD will be the last recorded entertainment format that we will go out and buy. After that, all entertainment will be streamed over electronic communications networks into the home.

Previous technology revolutions, such as the switch from black and white television to colour, suggest that the substitution will take about 10 years. However, since it all depends on the Internet, presumably we can halve this.

People without money - teenagers and students - have begun the process. With the curiosity to use experimental software and the time which narrowband access requires, they are routinely downloading music, games and video, as well as live radio and television. The Internet was born from anarchy and mutation and Napster has played an influential role. Copyright laws caught up with Napster but now laws too are mutating to facilitate (and exploit) rather than inhibit online entertainment. Most ABC1 adults resist using online resources, and should not be the barometer of change. SMS was the same. The youth of today are responsible for the rebirth of the communications industry.

Consumer enthusiasm for online entertainment is the demand which OFTEL was looking for when it published the first Access to Bandwidth consultation on the future of broadband. It was a chicken and egg debate – which comes first, supply of online content or customer demand for it: if there is no demand for services requiring broadband infrastructure, how can regulatory action be justified to require broadband roll-out? Investors saw the opportunity and put the supply first. Demand didn’t materialise in time and the online revolution stalled. We are now at the turning point.

What can the communications industry do to capitalise on the opportunity? Increase storage capacity and improve conveyance speeds.

Chip technology is advancing. Equipment manufacturers are developing recording and compression products which can recover, manipulate and reproduce large quantities of downloaded information. This means that consumer systems and software will be differentiated by the privacy and virus protection they offer and their ability to promote effective use of the customer data which a bilateral online relationship makes available. These functions influence the purchasing choices of the end-user and of the content provider, both of whom are customers for the technology manufacturing industry.

However, reliance on operating systems into which a variety of user-installed applications can be slotted is now only half of the equation. The rest is delivery.

In most EU Member States, ‘broadband’ is now available and affordable to anyone who lives in or near a town, within 5km of a telephone exchange. In less densely populated areas, it is only a matter of time before universal service commitments catch up with broadband services. For operators of electronic communications networks, the ground work is already laid in the EU 2002 Universal Service Directive (2002/22/EC). For national and regional governments, European Structural Funds (Objective 1 and possibly 2) provide resources and a roadmap.

However, bandwidths of 512 kbps which offer faster than narrowband internet access and consequently qualify as broadband for the purposes of universal service in the EU, are not adequate for downloading recorded entertainment which requires a minimum of 2 mbps. Not only this, few ‘broadband’ telecommunications networks at present are designed to support the applications which make online entertainment user friendly.

On justifying the investment in broadband, much has been said about the costs and benefits of ‘vertical integration’. Narrowband services remain dominated by established operators whose retail base allows them to control access. The difficulty of getting past a competitor’s embedded access advantages has overwhelmed resellers and fixed infrastructure new entrants alike.

And narrowband voice and basic data service providers simply don’t need anyone else to offer their own services. In a market where access was connected to backhaul and on to trunk switching or routing via IP connections to public and private international networks, there has been little opportunity for companies who could contribute to the sophistication of the services on offer but didn’t provide a vital link in the chain. In this ‘vertically integrated’ model, customers couldn’t or didn’t differentiate between services, they only looked at price. Incumbents won.

A better way to describe this set up is ‘horizontal integration’ from end-user to end-user or from viewer to server. BSkyB was celebrated and chastised for taking the horizontally integrated model to its ultimate conclusion by buying up control of content. Some now say the broadband entertainment market is foreclosed since all the good content has gone. This might be true of television broadcasting, but it is not true of recorded entertainment. That market is still in its infancy.

Demand for recorded content over communications networks – and end-user expectations of what they can do with it once they’ve got it – will require telecoms operators to concentrate on what they are good at – upgrading and running networks. True broadband will, within 10 years (or is that 5?) be taken for granted. What will differentiate networks is the applications that are available over them. The successful vertically integrated operator of the next few years will be the one supporting the applications which customers and content providers choose, to enhance viewing and listening pleasure. There are no incumbents, no historical advantages.

Looking at this with today’s values, it might seem attractive to control an exclusive vertical value chain but come the online revolution, that won’t be necessary or possible. Internet-based usage will continue to mutate to get into walled gardens. Over 10 years, the users with purchasing power will be the teenagers of today who have grown up with online entertainment and expect everything to be available. If the big players aren’t offering what they want, somebody will improvise. Everyone has an interest in interoperability. The more diversity a network is capable of supporting ie the more it welcomes non-proprietary applications, the more users it will attract.

What does this mean right now? It means that operators who are doggedly rolling out broadband in a competitive market which appears to have breathed its last, have got their timing precisely right.