Events & presentations

11/10/2005

Chatham House Conference. Thousands to millions. The New Diversity in Broadcasting and Telecommunications

SESSION FOUR - Promoting successful business in a post-analogue world
Seizing opportunities in the thousands to millions environment
'LET THE CUSTOMER DECIDE'

Good morning.

It's a strange thing being what's called a 'business leader'. People presume that you possess a magic crystal ball and can predict the future clearly. They expect you to tell them what customers will be buying in 10 years time, how much they will be spending and how the market will develop.

And who can blame them - it's something we would all like to know.

But as I stand here today, I have to say the future looks very unclear. None of us really know what the new converged media world will be like. We are all still testing out the water - BT with Fusion; broadcasters with podcasts; the BBC with MyBBCPlayer ,- which will allow viewers legally to download seven days of programmes; Google with its VoIP offering, and so on and us at O2 with DVB-H mobile TV and super-fast 3G - otherwise known as HSDPA.

It's anyone's guess who the winners and losers will be. As you would expect, I'd like to bet on mobile. Mobile has a generational advantage - millions of young people see their mobiles as almost an extension of themselves. I'll come back to that.

I don't have a crystal ball - but that doesn't stop me from having my own ideas about the future. Today I would like to share with you what I think will be the major changes and developments in a converged media world, and my views about the role of government and regulator in this changing environment.

1. The most obvious thing we can expect is a change in the business landscape.

This is of course already happening.

Digital convergence in content and services is blurring what up until now we have considered 'the norm'.

Just look at us here today. Previously when I spoke at conferences they would have been 'telecommunications' conferences - attended by telecommunications companies. That was the world in which we operated. It was all relatively straightforward.

We recognize we are now part of a much bigger 'digital communications' industry. Many of the big opportunities and challenges facing us are shared with broadcasters, content providers and internet companies, not to mention handset manufacturers.

In the UK this has been seen most obviously in our last round of legislation with a 'Communications Act' not a 'Telecommunications Act', and of course, our converged regulator OFCOM.

That's not to say that we should always look to the structure of regulators to see the structure of the market. In Germany the telecoms regulator, headed by Matthias Kurth, who spoke here yesterday, recently merged with the railways and gas regulators to create a Federal Network Agency.

Of course, we all come at things from different angles but the big picture is the same. Our technologies and businesses are merging together. There are new opportunities - but also new competitors.

We are having to reexamine - and in some cases - reinvent ourselves. Areas of responsibility are becoming blurred.

Broadcasters, for instance, just used to broadcast programmes to millions of people. They would pump out hours of scheduled programmes to anyone who tuned in. You could either watch it or not.

Now broadcasting is changing. There is more choice with digital and it is interactive with 'phone voting' and red-button services - an interactivity also widely pioneered by mobile with its text voting services on programmes like Big Brother.

It is also becoming more personal. With broadband and mobile technology, content can be tailored to individuals and is easily accessible on demand. Customers can pick and choose what they want to watch and listen to and when. And with DVB-H, they can now choose where to watch as well.

Telecommunications used to be all about one to one relationships - picking up the phone, or switching on your mobile, and having a private chat with whoever. Now it's not only about one to one communications - but one to millions as the capability to broadcast across this channel becomes available.

Across the communications sector, customers' consumption patterns are changing. There are more sources of content to choose from - such as the radio, TV, internet and print media. And there are more ways that customers can access, consume and pay for this content - through a pc, mobile, freeview or sky plus box, on media players, game devices and mobile handsets.

In short - customers can choose what they want, when they want, and where they want - and pay for it in all different ways.

Inevitably, developments in technology are also leading to changes in, and the introduction of, new business models.

At a most basic level, companies have to look again at how they make money.

Broadcasters used to get their revenue from license fees or advertising. Then came the concept of pay TV and subscriptions.

In the mobile telecommunications business we have always made much of our money from access. You pay us for delivering your communication - whether it's a telephone conversation, text message, game, music track or picture.

But the days of mobile operators receiving most of their revenue from delivering access are perhaps coming to an end.

Why? Because new technologies such as IP and file sharing have spawned a range of innovative companies and services with new business models - such as Skype with its cheap and free phone and IM service; Google with its new IM service and Napster and itunes with their download and file share services.

The combination of what customers want, new forms of rich content and new technology such as IP are all disrupting the status quo and forcing us to think again.

If we are to survive as an industry, mobile phone operators need to think more about the value chain. Are we just a pipes and wires business - or are we also about delivering content?

If we are gradually becoming more about content, we need to work more with content providers and also do more to enable our customers to generate their own content. For instance, we need to build up services in areas such as messaging, search tools, menus and rich content. O2 has just launched i-Mode in the the UK - a new easy to use, fast mobile internet service and we are trialing broadcast television services DVB-H.

A further thought to ponder is the fact that of the 650m corporate email inboxes out there, so far only 8 million of them can be accessed on the move - and yet, probably more than a quarter of all people at work are mobile.

So, the business landscape is changing - along with our business models. And this in itself creates a great deal of uncertainty.

2. The second major development I predict is a further shift in power to the customer. This can only be a good thing.

We can endlessly debate and analyse where we think the market is going - but it is the customers who will decide.

To a large extent this has always been the case in the telecommunications market. Just look at SMS and file sharing. Customers spotted a good use for our technology and they, not us, developed a market that suited their needs.

And the same thing will happen in a converged media world.

With greater choice, customers will also become more demanding. Brands will have to work harder to engage and keep their customers. Customers will expect us to get it right first time, every time. They will decide what they want and it will be up to us to provide the technology to make it possible.

So - for instance - customers will expect to be able to transfer content across different devices and platforms. When a customer buys an mp3 download for their PC, they will presume they can share it with their mobile media player when they go out - and not have to pay again. We can not afford to be inflexible - or overprotective about how our products and services interact with each other. At the same time we in this wider industry will have to work together more to ensure that the content market is able to flourish fully.

If customers are all powerful, we need to get better at listening to them and trialing our products and services so that we know early on where the winners are. This applies not just to the technology in customers' hands, but also the technology under the ground and in the air. Between us, we will construct a patchwork of technology across our territories, of GSM, GPRS, DVB-H, HSDPA, DSL, DAB and so on. (As much an alphabet soup as a patchwork, I will admit,) This mesh of technology will be opaque to the customer, but will offer them the kind of flexibility and inter-operability they seek. In other words, the best possible service whenever and wherever they want it.

3. My third prediction is that mobile will grow in importance

I have been surprised about how up until now a lot of the convergence debate has focused on internet versus broadcast. Mobile has not had a proper look in.

But if the customer is becoming more powerful - and you look at what he or she wants - it is flexibility and mobility. They want all the content and entertainment the digital world offers - but they want it at home, on the bus, in the street or at work. In short, they want mobility.

I saw a survey of American teenagers recently that underlined the trend. According to the survey, teenagers are very attached to their mobile phones. One half of those questioned said that they would rather have their TV privileges restricted than their mobile phone use, while more than a quarter - 27% - said they would prefer to have Web access or use of iPods limited, rather than have their mobile phones taken away. I don't think any of us can over-estimate the way in which mobile has become as intrinsically natural to younger people, as radio was to many of us in the room. Mobile phones are the ultimate mass consumer device - I shouldn't need to remind you that there are now more mobiles in circulation than PCs and TVs combined! No wonder there is interest in convergence.

There is no doubt that mobile is a very personal tool with a different communications capability than anything else.

You only need to look at the figures to see how we have become a mobile society. There are now more mobile phones in the UK than people and over 200 million mobile phone calls are made each day. The mobile industry now contributes more than 2.2% of the UK's total economic output.

And increasingly, people are using their mobiles for things other than just talking. Last year, for example, we carried one billion texts per month on our network. Our data services revenue - which includes text and other messaging services such as email and picture messages, as well as services such as music, content downloads and information services - now accounts for more than 25% of O2 UK service revenue.

So for us it's very clear - the future is mobile.

That's why at O2 we are investing so heavily in new technology for a cross media world and are at the forefront of developing new services that customers want. We are conducting trials into HSPDA, a technology we believe will make mobile broadband a reality - next month we will launch our commercial service,on the Isle of Man, and plan a full roll-out in 2006, and as I have mentioned in mobile television using DVB-H. As you would expect we are also investigating the potential of other technologies, Wireless LAN, DSL and so on.

We have also teamed with NTT DoCoMo Inc, Japan's largest mobile communications provider, to launch a mobile internet service branded i mode in the UK and Ireland this week. A similar service will be available in Germany from Spring 2006.

The UK telecommunications industry is a world leader. It is important that we recognize the true value of mobile in a converging world - if we do not, other countries will be quick to jump in.

So, there are the three big developments I see moving forward - a big change in the business landscape, more power to the consumer and mobile playing an increasingly important role.

Given all this, what should the role of government and the regulators be in this converging new world?

In my view, there are four specific challenges facing them today.

1. The first is to create the right economic environment for convergence to succeed

As I have said the future is uncertain - and with uncertainty comes risks. On top of this the industry is already facing economic uncertainty, market volatility and increasing competition, and inevitably the issue of market consolidation.

We need an environment that encourages us to invest. We need to know that if we are prepared to take risks in creating and enabling new markets to flourish, we can expect a reasonable return.

Critical to all of this is stability and predictability when it comes to regulation. It is important that we know where we stand with regards to tax, consumer protection and other key issues decided by government and regulators - and not just where we stand today, but tomorrow too.

If we have the right regulatory environment, then we are prepared to take commercial risks. So, it's not a low risk environment that we want - just a low regulatory risk.

At the moment it all seems far from predictable. Just as our technology and industries are converging - our regulatory framework is getting bigger, more complicated and less transparent.

Up until now the telecommunications industry has had its very own regulator. It was simple. We had a fairly good idea of the parameters in which we worked. Now we will also come under the control of other regulators with responsibilities for areas such as financial services or advertising - and they all have different aims and agendas, but bring us into the realms of regulation covering money laundering, gambling, and indeed broadcasting.

And everyone operating in the marketplace - telecommunication companies, broadcasters and content providers - should be given the same opportunities to invest. So, for instance, the broadcasters should not be given preferential treatment with regards to the DVB-h spectrum. In a world where we are all converging together, it is only fair that mobile operators have the right to bid for a share of new spectrum.

To encourage investment we also need government and regulators to think in the long-term, rather than trying to secure short term deals for customers apparently - but only superficially - in their best interests. It takes time to get things right - as has been seen with 3G. We need to be given the time to do our job properly; to innovate, invest and implement.

2. Challenge number 2 is not to over regulate

To create an environment in which we can innovate and invest, we need to be given the space and flexibility to test out and implement new and innovative services. And that means having simple - and not too much - regulation.

The approach taken by the mobile industry in a number of areas has much to commend it. Regulators are always under pressure, often political, to regulate wherever there are social concerns. But, to their credit, they have resisted. And what has happened? The industry has regulated itself. We have introduced - and are adhering to - codes of practice covering issues such as adult content, spam, premium rates, assistance for the disabled and elderly and location based services. What is clear is that self-regulation works, and works well.

We also need to have consistent regulation as different sectors converge. There needs to be a level playing field so that heavily regulated entities do not come under unfair competition from more lightly regulated ones.

Personally, I would like to see a leveling of the field to the lowest common dominator - rather than to the highest, as proposed by the Television without Frontiers directive.

Given half a chance, we can and do behave responsibly.

At O2, for instance, we are constantly challenging what we do and how we behave as a corporate citizen. As a result we did not go down the gambling route until we had proper age verification systems in place. We have also walked away from money making initiatives - such as selling adult content and running chat rooms in Ireland - because we felt they were not socially or commercially right for that market. We have invested massively in our brands, and our corporate reputations. Frankly, in such a competitive environment the risk of reputational damage is a much more effective check that any threat of regulatory intervention.

And customers too can be trusted to behave responsibly provided we are open and inform them about what technology does. In fact, in a world where media is becoming so much more personal, it is critical that customers are media literate and know how to protect themselves - again, operators have taken up the responsibilities for promoting customer awareness of the potential risks associated with the misuse of our services and products.

3. The third challenge is content regulation

The big question here is how should content be regulated over so many different distribution channels in the thousands to millions environment?

The public service concept of broadcasting certainly serves a purpose. But is it really realistic and practical for mobiles to be bound by the same rules as public broadcasting?

It is not obvious that current broadcasting regulations should be extended to all new delivery platforms, and care is needed to avoid unintended effects that prevent commercial development.

It is important, therefore, that the 'TV without Frontiers' European directive gets it right. The directive is supposed to open up the TV market across Europe and will have a significant impact on the development of content on all networks.

The broad definitions used to define services means that telecommunications is included, but to date mobile operators have not been closely involved in the consultation process. This is plainly wrong. If you are going to regulate you need to ensure that everyone affected is fully involved in the consultation process.

4. The fourth and final challenge I want to touch on is the issue of intellectual rights

The issue here is what are 'TV' rights and what are 'mobile' rights when technologies are converging.

My concern is that the complexity of the rights associated with content and the way they are currently licensed, could hold back the development of new content markets.

I am not questioning the rights of the FA to sell its IP on an exclusive basis - that clearly is a matter for the competition authority. I would, however, be concerned if an agreement with Sky or the BBC for TV rights and Vodafone for mobile rights, impinged on our ability to package football content for a new 'mobile TV' genre.

And - if we look at collecting societies - they have national monopolies and are inflexible in the way they license content, resulting in higher costs, delays and uncertainty in launching new music services.

The reality is that many content licensing regimes and associated regulation were established in an era that significantly predates the type of demand and technology we now have for delivering content to customers and may hinder the opening up of new services to consumers. Similarly, we cannot underestimate the importance of DRM to the effective development of new content markets in general, and of mobile content in particular. If we cannot ensure rights owners' rights (and revenues) are protected, they will be reluctant to work with us to grow those markets. This whole area needs to be carefully looked at.

There should be greater transparency in the contents rights market, open access to the rights for those businesses which are interested in them and more effective appeal mechanisms, to enable and promote proper commercial negotiations.

Finally, to conclude.

The future may be very unclear, (but to my mind, more likely to be blue than orange). There is one thing for certain - it will be the customer who leads us all forward.

So, businesses need to get better at listening to their customers, and government and regulators need to get better at enabling, rather than limiting, the growth of new markets. They need to try and resist the temptation of picking the winners, so that customers and the markets are left to determine which services succeed or not. And if they do that, I am confident that mobile and more importantly the customer will undoubtedly come out on top.

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